FORM 10−KDONNELLEY R R &SONS CO − RRD

Filed: February 23, 2004 (period: December 31, 2003)

Annual report which provides a comprehensive overview of the company for the past year

Table of ContentsPART I

ITEM 1. BUSINESSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

PART II

ITEM 5. MARKET FOR R.R. DONNELLEY SONS COMPANY S COMMON EQUITYAND RELATED STOCKHOLDER MATTERS

ITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON

ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A CONTROLS AND PROCEDURES

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF R.R. DONNELLEY SONSCOMPANY

ITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND

MANAGEMENTITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ONFORM 8−K

SIGNATURES ITEM 15(a). INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT

SCHEDULES

EX−10.D

EX−10.N

EX−10.O

EX−12 (Statement regarding computation of ratios)

EX−14 (Material foreign patents)

EX−21 (Subsidiaries of the registrant)

EX−23 (Consents of experts and counsel)

EX−24 (Power of attorney)

EX−31.1

EX−31.2

EX−32.1

EX−32.2

Table of Contents

UNITED STATESSECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10−K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1−4694

R. R. DONNELLEY & SONS COMPANY(Exact name of registrant as specified in its charter)

Delaware 36−1004130(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

77 West Wacker Drive,Chicago, Illinois 60601

(Address of principal executive offices) (ZIP Code)

Registrant’s telephone number—(312) 326−8000

Securities registered pursuant to Section 12(b) of the Act:

Title of each ClassName of each exchange on

which registeredCommon (Par Value $1.25)

Preferred Stock Purchase RightsNew York, Chicago and Pacific Stock ExchangesNew York, Chicago and Pacific Stock Exchanges

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filingrequirements for the past 90 days. Yes ü No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S−K is not contained herein, and will not be contained, tothe best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10−K or anyamendment to this Form 10−K.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b−2). Yes ü No

As of June 30, 2003, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the shares ofcommon stock (based on the closing price of these shares on the New York Stock Exchange—Composite Transactions on June 30, 2003) held bynonaffiliates was $2,868,079,728.

As of February 4, 2004, 114,392,809 shares of common stock were outstanding.

Table of ContentsTABLE OF CONTENTS

Form 10−KItem No. Name of Item Page

Part I

Item 1. Business 3Item 2. Properties 8Item 3. Legal Proceedings 8Item 4. Submission of Matters to a Vote of Security Holders 9

Executive Officers of RR Donnelley & Sons Company 10

Part II

Item 5. Market for RR Donnelley & Sons Company’s Common Equity and Related Stockholder Matters 11Item 6. Selected Financial Data 11Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 12Item 7A. Quantitative and Qualitative Disclosures about Market Risk 44Item 8. Financial Statements and Supplementary Data 44Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 44Item 9A. Controls and Procedures 44

Part III

Item 10. Directors and Executive Officers of RR Donnelley & Sons Company 46Item 11. Executive Compensation 50Item 12. Security Ownership of Certain Beneficial Owners and Management 58Item 13. Certain Relationships and Related Transactions 61Item 14. Principal Accounting Fees and Services 61

Part IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8−K 63Signatures 64

Item 15(a). Index to Financial Statements and Financial Statement Schedules F−1Index to Exhibits E−1

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Table of Contents PART I

ITEM 1. BUSINESS

Industry and Company Overview

RR Donnelley prepares, produces and delivers integrated communications services that efficiently and effectively produce, manage and deliver our customers’content, regardless of the communications medium. While our print capabilities remain the foundation of the company, our recent focus on expanding our rangeof offerings with value−added services allows us to create additional value for our customers.

We provide solutions designed to enhance the effectiveness of our customers’ communications. Our services include:

• Content creation—to provide creative design services to maximize the impact of communications and improve response rates. In addition to ourin−house capabilities, alliances with best−in−class providers complement our service offerings.

• Digital content management—to help our customers leverage their content to reach end−users through multiple marketing channels. Through ourPremedia Technologies Services (Premedia), we digitally capture content, convert it to the appropriate format and channel it to multiplecommunications media including print and the Internet.

• Production—to drive results for our customers cost−effectively through print or the Internet. Our manufacturing operations around the world offer afull range of capabilities and are networked to quickly produce large printing jobs with identical specifications. We also are able to version printedcontent to reach targeted audiences.

• Distribution—to deliver our customers’ words and images efficiently and reliably through print or the Internet. RR Donnelley Logistics (Logistics)delivers printed products and packages to the U.S. Postal Service (USPS), saving our customers significant time and money. We also offer a full rangeof services to deliver value, maximize content effectiveness, enhance our clients’ businesses and build their customer relationships via the Internet.

Our 139−year history as a printing industry leader positions us well for the future. We expect print advertising to remain among the most cost−effective ways forour customers to deliver their messages and generate revenue as they use words and images to inform, educate, entertain and sell to their audiences.

We believe that print will remain integral to successful marketing given its unique capabilities, such as portability and high−quality graphics that cannot beduplicated by other communications methods. We also believe that the nature of print will continue to evolve. The ability of print to be targeted, timely, flexibleand integrated with other communications media will become even more critical.

End Market Descriptions

We operate primarily in the commercial print portion of the printing industry, with related service offerings designed to offer customers complete solutions forcommunicating their messages to targeted audiences. While our manufacturing plants, financial service centers and sales offices are located throughout the U.S.and selected international markets, the supporting technologies and knowledge base are common. Our locations have a range of production capabilities to serveour customers and end markets. We manufacture products with the operational goal of optimizing the efficiency of the common manufacturing and distributionplatforms. As a result, most plants produce work for customers in two or three of our end markets.

The following describes the end markets we serve:

Magazines, Catalogs and Retail RR Donnelley is a leader in the North American magazine, catalog and retail markets. These markets are characterized bydemand for large, cost−effective print runs with opportunity for

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Table of Contentsdifferentiation among competitors through services such as Premedia and Logistics. Our U.S. customers include the majority of the top 10 magazine titles and amajority of the largest consumer catalog companies and retailers. Contracts typically span from three to five years.

We are also a leader in providing short−run publishers, catalogers and associations with comprehensive communications solutions. We serve customers withhighly targeted audiences and typical production runs of 15,000 to 200,000 copies. We offer full−service and cost−effective solutions for business−to−businessand consumer magazine and catalog publishers, as well as journal, association and academic publishers.

Telecommunications RR Donnelley is a worldwide leader in the telephone directory market. We serve the global directory needs of telecommunicationsproviders, including three of the four U.S. Regional Bell Operating Companies (SBC, Verizon and Qwest), independent directory publishers such as YellowBook, Feist, RH Donnelley and White Directories, and leading international directory publishers such as Yell and Shanghai Telephone. Directory contractstypically span five to 12 years, with our current major contracts expiring between 2006 and 2015.

Book RR Donnelley, the leader in the North American book market, serves the consumer, religious, educational and specialty book segments. We are a keyservices provider for the majority of the top 10 U.S. book publishers and we typically print more than 50% of The New York Times’ adult best−seller titles. Wealso print approximately one−third of all textbooks used in U.S. classrooms.

Premedia RR Donnelley’s Premedia business partners with customers to effectively create, manage, prepare and distribute customer content. We offer servicesin both conventional and digital photography, creative and color services, page production, ad management, facilities management and content management.Integrating these core competencies enables us to help customers efficiently, consistently and successfully deliver their messages across multiple channels,including print and the Internet. We leverage our experience in content production and workflow optimization to link customers’ creative processes with today’stechnologies. Facilities located in key markets provide close customer contact with nationwide scale−up capabilities. Premedia’s services are used byleading−edge companies in the advertising, catalog, corporate, magazine, retail and telecommunications markets.

Financial RR Donnelley’s financial business, a leader in the U.S. and international financial services markets, supports the communications needs ofcorporations, and their investment banks and law firms, as those corporations access the global capital markets. We also are a leading provider of customizedcommunications solutions for investment management, banking, insurance, and managed care companies.

Our capital markets business is a global leader integral to the capital raising and regulatory process worldwide. Our global service network, manufacturingplatform and distribution system give us unique advantages in servicing the capital raising industry, particularly for large financial transactions, including initialpublic offerings, mergers and acquisitions. We serve our corporate, legal and investment banking clients’ needs for responsiveness and reliability by providingEDGAR expertise, project and content management, virtual deal management and web−based solutions, and process insight. During 2003, our self−filingNET.filer solution was expanded to all Section 16 documents and client education programs were added to help our clients meet the accelerated and expandedfiling requirements mandated by the U.S. Securities and Exchange Commission (SEC).

Our customized communications solutions business is a leader in the U.S. investment fund companies market, for which we manage and produce compliance andmarketing communications more efficiently and effectively. We provide an integrated suite of content and information management, production and deliverysolutions designed to help our clients meet U.S. disclosure requirements and to generate longer−lasting relationships with their customers. In 2003, weintroduced Document Directorsm, our exclusive web−based technology platform that enables content to be shared across multiple communications, supportingenhanced workflow and process efficiency.

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Table of ContentsDirect Mail Direct Mail offers expertise in a wide range of direct marketing print and related services, to guide customers smoothly and cost−effectivelythrough direct−marketing projects. Our full−service solutions include content creation, database management, premedia, printing, personalization, finishing anddistribution. We produce highly personalized and sophisticated direct mail pieces that generate results for our customers.

International We have extended our core competencies for high−quality print and related services into non−U.S. geographic markets. These markets tend to beemerging, with favorable demographic trends such as rising education levels and increasing disposable income. Our operations in Latin America, Poland andChina, where we produce magazines, books, telephone directories and technology manuals, are reported as “International.” Financial’s international revenue isincluded in “Financial.” Directory revenues from England are included in “Telecommunications.”

Logistics RR Donnelley is one of the largest users of the USPS, handling over 20 billion print and mail pieces and over 180 million packages each year.Distribution costs are a significant component of our customers’ cost structures, and our ability to deliver mail and packages more predictably andcost−effectively than competitors is a key differentiator. By leveraging our national network as well as the USPS infrastructure to make the final delivery tohouseholds and businesses, we provide more economical logistics services to both markets. Through “zone skipping,” greater postal discounts are obtained, andwe provide more economical, reliable and easy−to−use delivery services for our customers.

In addition to delivering packages and printed material, Logistics also provides expedited distribution of time−sensitive and secure material (expedited services).Together, these services help merchandisers and other businesses manage their supply chains more effectively and at a lower cost.

Beginning January 1, 2003, we revised our segment reporting to reflect Financial as a separate segment. Our Financial operations were previously reportedwithin the Other business segment. As a result of these changes, we disclose the following three reportable segments: Print, Logistics and Financial.

Financial and other information relating to these business segments is included in Item 7, Management’s Discussion and Analysis of Financial Condition andResults of Operations, and in Note 18, Industry Segment Information, to the consolidated financial statements. Within the Print segment, our business isconcentrated geographically in the U.S., and we have 31 operating facilities as of December 31, 2003 that generated $3.0 billion in net sales in 2003. Within theLogistics segment, we have 33 operating facilities within the U.S. as of December 31, 2003 that generated $913 million in net sales in 2003. Within the Financialsegment, we have six operating facilities in the U.S. and two operating facilities outside the U.S. as of December 31, 2003 that generated $426 million in netsales in 2003. Direct Mail, included in the Other segment, has three operating facilities in the U.S. as of December 31, 2003 that generated $112 million in netsales in 2003. In addition to our U.S. facilities, we operate nine plants in Latin America, Europe and China. Information relating to our international operations isincluded in Note 19, Geographic Area Information, to the consolidated financial statements.

Commercial printing remains a competitive industry. Consolidation among our customers and in the printing industry, as well as over−capacity in the industry asa whole, has put pressure on prices and increased competition among printers. We compete by leveraging our position and size, generating continuedproductivity improvements and enhancing the value we deliver to our customers by offering them products and services that improve their effectiveness andreduce their total delivered cost. While we have contracts with many of our print customers as discussed below, there are many competing companies andrenewal of these contracts is dependent, in part, on our ability to continue to differentiate ourself from the competition. While our manufacturing and distributionfacilities are well located for the global, national or regional distribution of our products, competitors in some areas of the U.S. may have a competitive advantagein some instances due to such factors as freight rates, wage scales and customer preference for local services. In addition to location, other important competitivefactors are price and quality, as well as the range of available services.

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Table of ContentsDemand in several of the end markets served by Print and Logistics is affected by advertising and consumer spending trends. Historically, our businesses whichserve the Magazines, Catalogs and Retail and Book end markets generate higher revenues in the second half of the year, driven by increased advertising pageswithin magazines, and holiday catalog, retail and book volumes. These same factors drive higher revenues in the second half of the year for both our print andpackage logistics businesses.

Approximately 60% of our total company sales are under term contracts with customers, with the remainder on a single−order basis. For some customers, weprint and provide related services for different publications under different contracts. Contracts with our larger customers normally run for a period of years(usually three to five years, but longer in the case of contracts requiring significant capital investment) or for an indefinite period subject to termination onspecified notice by either party. These sales contracts generally provide for price adjustments to reflect price changes for materials, wages and utilities. No singlecustomer had a relationship with the company that accounted for 10% or more of our sales in 2003.

The primary raw materials we use in our print businesses are paper and ink. In 2003, we spent approximately $1.3 billion on raw materials. We are a largepurchaser of paper and our focus is to improve materials performance and total cost management for our customers, which we believe is a competitive advantage.We negotiate with leading suppliers to maximize our purchasing efficiencies, but we do not rely on any one supplier. We have existing paper supply contracts (atprevailing market prices) to cover substantially all of our requirements through 2004 and management believes extensions and renewals of these purchasecontracts will provide adequate paper supplies in the future. Ink and related materials are currently available in sufficient amounts, and we believe that we willhave adequate supplies in the future. We also coordinate purchasing activity at the local facility and corporate levels to increase economies of scale.

Our Logistics segment is a large purchaser of transportation services. While there are currently sufficient sources of these services, the cost of such services hasbeen affected by fuel prices as well as by changes in government regulations. We continually work to leverage the volume we give third−party transportationcompanies in order to minimize transportation costs.

Our overriding objectives in the environmental, health and safety areas are to create sustainable compliance and an injury−free workplace. We believe thatestimated capital expenditures for environmental controls to comply with federal, state and local provisions, as well as expenditures, if any, for our share of coststo clean hazardous waste sites that have received our waste, will not have a material effect on our results of operations or our competitive position.

As of December 31, 2003, we had approximately 30,000 employees. Approximately 7,400 employees in our U.S. workforce have been our employees for 10 to24 years, and more than 3,100 have been our employees for 25 years or longer. As of December 31, 2003, we employed approximately 24,000 people in the U.S.,approximately 360, or 2%, of whom were covered by collective bargaining agreements. In addition, we employed approximately 6,000 people in ourinternational operations, approximately 1,800, or 30%, of whom were covered by collective bargaining agreements.

On November 8, 2003, we entered into a combination agreement with Moore Wallace Incorporated (Moore Wallace), a leading provider of print managementand outsourced communications. Based on the terms of the agreement, a direct, wholly−owned subsidiary of RR Donnelley will acquire each of the outstandingcommon shares of Moore Wallace for 0.63 of a share of common stock of RR Donnelley. We expect that, upon closing of the transaction, we will issueapproximately 100 million shares of RR Donnelley common stock, as well as undertake the obligation for the indebtedness of Moore Wallace which wasapproximately $900 million as of December 31, 2003. The transaction was approved by the Boards of Directors of both RR Donnelley and Moore Wallace, butremains subject to certain closing conditions that include, among others, the receipt of required approval from both companies’ shareholders and OntarioSuperior Court of Justice approval of a plan of arrangement. The transaction is expected to close on February 27, 2004. See related discussion under

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Table of ContentsExpected Impact of Combination with Moore Wallace Incorporated under Item 7, Management’s Discussion and Analysis of Financial Condition and Results ofOperations.

On March 6, 2003, we acquired certain net assets of Momentum Logistics, Inc. (MLI), a Florida−based provider of package distribution services, forapproximately $17 million in cash. MLI operates sortation facilities and a dedicated fleet of vehicles to provide package distribution services. The purchase pricehas been allocated based on estimated fair values at the date of acquisition and resulted in $16 million of goodwill. Subsequently, we recorded an impairmentcharge of $4 million for goodwill as a result of our annual impairment review performed under Statement of Financial Accounting Standards (SFAS) No. 142,Goodwill and Other Intangible Assets.

We did not make any business acquisitions during 2002 or 2001.

In December 2003, we sold our investment in MultiMedia Live to an unrelated third−party purchaser for $2 million in cash.

In July 2003, we sold our 25% equity investment in Global Directory Services Company to an unrelated third−party purchaser for $23 million in cash.

In November 2001, we sold our remaining investment in the common stock of Stream International Inc. (Stream) for $10 million in cash.

See Note 2, Divestitures, and Note 3, Acquisitions and Investments, to the consolidated financial statements for additional information.

During 2003, 2002 and 2001, we announced the closure of several of our facilities within the Print segment, Financial segment and International operations toimprove the effectiveness and efficiency of our overall print platform. During 2001, we also closed several start−up operations, including Red Rover Digital, thatwere included in the Other operating segment. See Note 4, Restructuring and Impairment, to the consolidated financial statements for more details.

Available Information We maintain an Internet website at www.rrdonnelley.com where our Annual Report on Form 10−K, Quarterly Reports on Form 10−Q,Current Reports on Form 8−K and all amendments to those reports are available without charge, as soon as reasonably practicable following the time they arefiled with or furnished to the SEC.

Special Note Regarding Forward−Looking Statements Our Annual Report to Shareholders, including this Form 10−K, are among certain communications thatcontain forward−looking statements, including statements regarding our financial position, results of operations, market position, product development andregulatory matters. When used in such communications, the words “believes,” “anticipates,” “expects” and similar expressions are intended to identifyforward−looking statements. These forward−looking statements are based on our estimates, assumptions, projections and current expectations and are subject toa number of risks and uncertainties. Actual results in the future could differ materially from those described in the forward−looking statements as a result ofmany factors outside our control, including war or acts of terrorism affecting the overall business climate; competition with other communications servicesproviders based on pricing and other factors; fluctuations in the cost of paper, fuel and other raw materials we use; changes in postal rates and postal regulations;seasonal fluctuations in overall demand for services; changes in customer demand; changes in the advertising and printing markets; changes in the capitalmarkets that affect demand for financial printing; the financial condition of our customers; our ability to continue to obtain improved operating efficiencies; ourability to continue to develop new solutions for our customers; the general condition of the U.S. economy and the economies of other countries in which weoperate; changes in the rules and regulations to which we are subject and the cost of complying with these rules and regulations, including environmental andhealth and welfare benefit regulations; changes in the costs of healthcare and other benefits provided to our employees; changes in

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Table of Contentsthe rules and regulations to which our customers are subject, particularly those affecting privacy or the printing requirements of Financial or Telecommunicationscustomers; our ability to complete acquisitions, including the combination with Moore Wallace, and to integrate the operations of the acquired businesses; andother factors set forth in this Form 10−K and other company communications generally. We do not undertake and specifically decline any obligation to publiclyrelease the results of any revisions to these forward−looking statements that may be made to reflect any future events or circumstances after the date of suchstatements or to reflect the occurrence of anticipated or unanticipated events.

ITEM 2. PROPERTIES

Our corporate office is located in leased office space in a building in Chicago, Illinois. In addition, as of December 31, 2003, we lease or own 73 U.S. facilities,some of which have multiple buildings and warehouses. The U.S. facilities encompass approximately 18.8 million square feet. We lease or own 11 internationalfacilities encompassing approximately 2.3 million square feet in Latin America, Europe and Asia. Of the U.S. and international manufacturing and warehousefacilities, approximately 17.2 million square feet of space is owned, while the remaining 3.9 million square feet of space is leased. In addition, we have salesoffices and financial services centers across the U.S., Latin America, Europe and Asia.

ITEM 3. LEGAL PROCEEDINGS

On December 18, 1995, a class action was filed against us in federal district court in Chicago alleging that older workers were discriminated against in selectionfor termination upon the closing of the Chicago catalog operations (Gerlib, et al. v. R.R. Donnelley & Sons Co.). The suit also alleged that we violated theEmployee Retirement Income Security Act (ERISA) in determining benefits payable under its Retirement Benefit and Separation Pay Plans to retiring orterminated employees.

On November 25, 1996, a class action was brought against us in federal district court in Chicago, Illinois, on behalf of current and former African−Americanemployees, alleging that we racially discriminated against them in violation of Section 1981 of the Civil Rights Act of 1871, as amended, and the U.S.Constitution (Jones, et al. v. R.R. Donnelley & Sons Co.). The complaint seeks declaratory and injunctive relief, and asks for actual, compensatory, consequentialand punitive damages in an amount not less than $500 million.

On June 30, 1998, a class action was filed against us in federal district court in Chicago on behalf of current and former African−American employees, allegingthat we racially discriminated against them in violation of Title VII of the Civil Rights Act of 1964 (Adams, et al. v. R.R. Donnelley & Sons Co.). While makingmany of the same general discrimination claims contained in the Jones complaint, the Adams plaintiffs also claimed retaliation by us for the filing ofdiscrimination charges or otherwise complaining of race discrimination.

On December 28, 2000, a purported class action was brought against us and certain of our benefit plans in federal district court in Chicago on behalf of certainformer employees of the Chicago catalog operations (Jefferson, et al. v. R.R. Donnelley & Sons Co., et al.). The suit alleged that enhanced pension benefits werenot paid to plaintiffs and that plaintiffs are being required to contribute to the costs of retiree medical coverage, both allegedly in violation of plan documents andERISA.

On April 6, 2001, in an amended opinion, the district court judge in the Jones and Adams cases certified three plaintiff classes in the actions: a class consisting ofAfrican−American employees discharged in connection with the shutdown of the Chicago catalog operations; a class consisting of African−American employeesof the Chicago catalog operations after November 1992 who were other than permanent employees; and a class consisting of African−Americans subjected to anallegedly hostile working environment at the Chicago catalog operations, the Chicago Financial, Pontiac or Dwight, Illinois, manufacturing operations.

Following fairness hearings held in March and April, 2003, the district court approved settlements resolving all of the issues in the Adams, Gerlib and Jeffersoncases and the issues in Jones which related to claims arising

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Table of Contentsin locations other than the Chicago catalog operations without any admission of wrongdoing by us. The total amount paid in connection with the settlements was$21 million, of which $9 million was paid by our Retirement Benefit Plan. The total pretax charge during 2002 related to these settlements was $16 million andwas recorded in cost of sales in the consolidated statements of income on page F−2.

In a decision issued September 16, 2002, the Seventh Circuit Court of Appeals overturned a ruling by the trial court and held that a two−year statute oflimitations applies to the claims in Jones filed under Section 1981 of the Civil Rights Act. The court of appeals remanded the case for further proceedingsconsistent with its opinion, and on November 21, 2002, the court of appeals denied plaintiffs’ petition for rehearing. On May 19, 2003, the United StatesSupreme Court agreed to review the issue of the appropriate statute of limitations to apply and has the matter scheduled for argument on February 24, 2004.

While the settlements described dispose of the Adams, Gerlib and Jefferson cases, and a portion of the Jones litigation, the issue relating to the application of thestatute of limitations to certain of the discrimination claims in the Jones case has not been finally decided. Management is unable to make a meaningful estimateof the overall loss, if any, that could result from an unfavorable final determination of this matter.

We have been designated as a potentially responsible party in 13 federal and state Superfund sites. In addition to the Superfund sites, we may also have theobligation to remediate five other previously−owned facilities; our share of these remediation costs is estimated to be less than $1 million. We have establishedreserves that are believed to be adequate to cover our share of the potential costs of remediating each of the Superfund sites and the previously−owned facilities.Although management believes its estimates are reasonable and are based on the latest available information, the cleanup costs are estimates and are subject torevision as more information about the extent of the remediation required becomes available. At the Superfund sites, the Comprehensive EnvironmentalResponse, Compensation and Liability Act provides that our liability could be joint and several, meaning that we could be required to pay an amount in excess ofour proportionate share of the remediation costs. Our understanding of the financial strength of other potentially responsible parties at the Superfund sites and ofother liable parties at the previously−owned facilities has been considered, where appropriate, in the determination of our estimated liability. Managementbelieves that any Superfund costs associated with our current status as a potentially responsible party in the Superfund sites or as a liable party at thepreviously−owned facilities will not be material to our financial position, results of operations or cash flows.

From time to time, our customers file voluntary petitions for reorganization under U.S. bankruptcy laws. In such cases, certain pre−petition payments received byus could be considered preference items and subject to return to the bankruptcy administrator. Management believes that the final resolution of these preferenceitems will not have a material adverse effect on our financial position, results of operations or cash flows.

In addition, we are a party to certain litigation arising in the ordinary course of business which, in the opinion of management, will not have a material adverseeffect on our financial position, results of operations or cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the quarter ended December 31, 2003.

On January 20, 2004, we mailed a joint management information circular and proxy statement to all RR Donnelley stockholders of record as of January 15, 2004,in connection with a special meeting of RR Donnelley stockholders to be held on February 23, 2004. The purposes of the meeting are to vote on a proposal toapprove the issuance of shares of RR Donnelley common stock as contemplated by the combination agreement dated November 8, 2003, between RR Donnelleyand Moore Wallace, and to vote on the adoption of a new performance incentive plan.

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Table of ContentsEXECUTIVE OFFICERS OF R.R. DONNELLEY & SONS COMPANY

Name, Age andPositions with the Company

Officer

SinceBusiness Experience During

Past Five Years(1)

John C. Campanelli46, President, Print

1990 Management responsibilities within Print for Magazines, Catalogs and Retail; Book;Global Solutions; Optimization; Solutions Delivery; Premedia; Telecommunications;Finance; and Human Resources. Prior experience as President, Logistics.

William L. Davis60, Chairman of the Board, Presidentand Chief Executive Officer

1997 Management responsibilities as Chairman of the Board, President and ChiefExecutive Officer. Prior experience as Senior Executive Vice President at EmersonElectric Company, manufacturer of electrical, electronic and related products, fromJanuary 1993 until March 1997.

Monica M. Fohrman54, Senior Vice President,General Counsel and Secretary

1988 Management responsibilities for Legal Department, Secretary’s Office andCommunity Relations.

Joseph C. Lawler54, Executive Vice President

1995 Management responsibilities for Logistics; Financial; Direct Mail; InternationalOperations; and Government Relations. Prior experience as President, CatalogServices and President, Merchandise Media.

Gregory A. Stoklosa48, Executive Vice President andChief Financial Officer

1993 Management responsibilities for Investor Relations; Treasury; Financial Reportingand Accounting; Financial Planning and Analysis; Internal Audit; and Taxes. Priormanagement experience as Vice President, Treasurer and Vice President, CorporateController.

(1) Each officer named has carried on his or her principal occupation and employment in the company for more than five years.

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Table of Contents PART II

ITEM 5. MARKET FOR R.R. DONNELLEY & SONS COMPANY’S COMMON EQUITY AND RELATED STOCKHOLDERMATTERS

Our common stock is listed and traded on the New York Stock Exchange, Chicago Stock Exchange and Pacific Exchange, Inc.

As of February 4, 2004, there were 8,260 stockholders of record. Quarterly prices of our common stock, as reported on the New York StockExchange−Composite Transactions, and dividends paid per share during the two years ended December 31, 2003, are contained in the chart below:

Common Stock Prices

Dividends Paid 2003 2002

2003 2002 High Low High Low

First Quarter $0.25 $0.24 $23.35 $16.94 $31.35 $27.50Second Quarter 0.25 0.24 26.47 18.17 32.10 25.76Third Quarter 0.26 0.25 27.59 23.06 28.40 22.63Fourth Quarter 0.26 0.25 30.15 24.75 23.55 18.50Full Year 1.02 0.98 30.15 16.94 32.10 18.50

ITEM 6. SELECTED FINANCIAL DATA

SELECTED FINANCIAL DATA(Thousands of dollars, except per−share data)

2003 2002 2001 2000 1999

Net sales $ 4,787,162 $ 4,754,937 $ 5,297,760 $ 5,764,335 $5,415,642Income from continuing operations* 176,509 142,237 24,988 266,900 311,515Loss from discontinued operations — — — — (3,201)Net income* 176,509 142,237 24,988 266,900 308,314Net income per diluted share* 1.54 1.24 0.21 2.17 2.38Total assets 3,188,950 3,181,963 3,385,617 3,914,202 3,853,464Noncurrent liabilities 1,322,216 1,312,639 1,512,920 1,491,093 1,511,743Cash dividends per common share 1.02 0.98 0.94 0.90 0.86

* Includes the following significant items affecting comparability:

• For 2003: restructuring and impairment charges of $16 million ($13 million after−tax, or $0.12 per diluted share), gain on sale of investments of $6million ($4 million after−tax, or $0.04 per diluted share) and a tax benefit of $46 million ($46 million after−tax, or $0.40 per diluted share; see Note10, Income Taxes, to the consolidated financial statements);

• For 2002: restructuring and impairment charges of $89 million ($54 million after−tax, or $0.47 per diluted share), tax benefit from the settlement withthe IRS on corporate−owned life insurance (COLI) of $30 million ($30 million after−tax, or $0.26 per diluted share) and gain on sale of businessesand investments of $6 million ($6 million after−tax, or $0.06 per diluted share);

• For 2001: restructuring and impairment charges of $196 million ($137 million after−tax, or $1.15 per diluted share), gain on sale of businesses andinvestments of $7 million ($7 million after−tax, or $0.05 per diluted share) and loss on investment write−downs of $19 million ($19 million after−tax,or $0.16 per diluted share);

• For 2000: gain on sale of shares received from the demutualization of the company’s basic life insurance carrier of $13 million ($8 million after−tax,or $0.06 per diluted share); and

• For 1999: gain on sale of businesses and investments of $43 million ($27 million after−tax, or $0.20 per diluted share).

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Table of Contents ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements and notes to thosestatements included in Item 15 of Part IV of this Form 10−K.

Overview

We operate principally in the commercial print portion of the print industry, with related service offerings designed to offer customers complete solutions forcommunicating their messages to targeted audiences. The dominant macro−economic and industry−wide trend for the past three years has been weaker demandduring a slow economy that has generated excess industry capacity resulting in increased competition and downward pricing pressures. In this intensifiedcompetitive pricing environment, companies have focused on reducing costs in order to preserve operating margins. We believe this environment has led to moreconsolidation within the commercial print industry as companies seek economies of scale, broader customer relationships, geographic coverage and productbreadth to overcome/offset industry over−capacity and pricing pressures.

Beginning January 1, 2003, we revised our segment reporting to reflect Financial as a separate segment. Our Financial operations were previously reportedwithin the Other segment. As a result of these changes, we disclose three reportable segments: Print, Logistics and Financial.

The primary drivers affecting our business differ by segment. In our Print segment, consumer confidence and economic growth rates are key drivers of demandfor commercial print, as these factors affect the level of advertising and merchandising activity. While general economic trends have recently begun to improve,we have not yet begun to see the positive effects of an economic recovery within our Print segment. Historical trends indicate that magazine advertising pages, akey indicator of demand for printing products and services, recover more slowly after a recession than other sectors of the economy.

Our Financial segment’s results are driven by the level of deal activity in the capital markets, as well as regulatory compliance requirements and our ability tocapture market share. During the second half of 2003, we benefited from increased capital markets activity following a three−year period of economic slowdown,as well as from our ability to gain market share through our focus on customer service. Continued increases in capital markets activity are likely to positivelyaffect demand for services within our Financial segment. However, volatility in the global capital markets makes it difficult to predict the future level of demand.

Our Logistics segment serves our customers by consolidating and delivering printed products (print logistics) and packages (package logistics) to the U.S. PostalService closer to the final destination, resulting in reduced postage costs and improved delivery performance. As postal costs are a significant component of ourcustomers’ cost structures, our Logistics segment is focused on providing services that enhance value to customers by improving the cost efficiency of mailprocessing and distribution. Our print logistics business is subject to many of the same macro−economic drivers as our print businesses. However, we havepartially overcome negative market demand trends of recent years by growing our volume with products printed by other printers, but delivered by us(third−party volume), due to our scale and performance levels. Print logistics is profitable and strategically important to our print customers.

During 2003, operating results of our package logistics business were negatively impacted by start−up problems at a new consolidation facility, as well asoperational issues from a recent acquisition. In addition, we identified weaknesses in our transactional processing systems for packages as we increased our scaleof operations and entered into more complex customer and carrier arrangements. Our ability to improve the profitability of our package operations is contingentupon our ability to fully address these operational and transactional processing issues as discussed on pages 23 and 44, as well as to sustain and grow ourcustomer base.

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Table of ContentsIn response to the above trends, we have regularly assessed our manufacturing platforms and logistics network to assure that they are efficient, flexible andaligned with customer needs. To meet this objective, we have closed several facilities that lacked the necessary scale and geographic location to remaincompetitive, and invested in expansions of other more scaleable operations. In addition, we have continued to execute other cost reduction initiatives across all ofour operations. We have also implemented strategic initiatives, including productivity programs such as six sigma and process variability reduction, as well asbusiness process redesign, which have positively impacted our financial results and helped to mitigate the effects of price erosion. Likewise, we have focused oncreating new revenue opportunities for value−added services such as premedia and logistics. As a result, we have created a broader platform to sell moreproducts and services as well as improve incremental revenue and profit growth within our current customer base.

In November 2003, we announced that we had entered into a definitive combination agreement (the Combination) with Moore Wallace Incorporated (MooreWallace). The transaction is anticipated to bring together two print industry leaders with highly complementary products and services to create the world’spremier full−service global provider and the largest printing company in North America. The strategy for the combined company will focus on improved returns,lower costs and increased profitability; increased financial strength; and enhanced revenue opportunities. While the detailed plans have not yet been finalized,management believes that the Combination will impact operating results in future periods through improved cross−selling efforts by providing a “totalmanagement solution”; leveraging product and distribution strengths; aggressive cost reduction efforts, including headcount and facility rationalization; andincreased purchasing power with suppliers to reduce costs and increase efficiencies.

Unless indicated otherwise, the discussion and financial results disclosed in this Annual Report on Form 10−K relate to RR Donnelley as a stand−alone entity,and do not reflect the impact of the pending Combination with Moore Wallace Incorporated. See Expected Impact of Combination with Moore WallaceIncorporated for further discussion of the transaction.

Significant Accounting Policies and Critical Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. The SEC has defined a company’s most critical accounting policies as those that are most important to theportrayal of its financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a resultof the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the following critical accounting policies andjudgments. Although we believe that our estimates and assumptions are reasonable, they are based upon information available when they are made. Actual resultsmay differ significantly from these estimates under different assumptions or conditions.

Revenue Recognition

We recognize print revenue when title and risk of loss transfers to the customer and the earnings process is complete. Approximately 60% of our business isunder contract. Contracts typically specify F.O.B. shipping point terms. We generally recognize revenue upon final shipment for a print job and not on a partialshipment basis. For most print jobs, it is common for customers to inspect the quality of the product at our facilities up to and including at the time of shipment.Our products are not shipped subject to any contractual right of return provisions. Absent specific contract terms, we recognize revenue upon final delivery of theproduct or upon completion of the service performed.

Within our Financial segment, which serves the global financial services end market, we produce highly customized materials such as regulatory S−filings, initialpublic offerings and mutual fund compliance

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Table of Contentscommunications, as well as provide EDGAR−related services. Revenue is recognized for these customers following final delivery of the printed product or uponcompletion of the service performed.

Revenues related to our Premedia operations, which include digital content management such as photography, color services and page production, are recognizedin accordance with the terms of the contract, typically upon completion of the performed service and acceptance by the customer. With respect to Logistics,whose operations include the delivery of packages and printed material, we recognize revenue upon completion of the delivery services we provide.

Accounting for Goodwill and Certain Other Intangibles

In assessing the recoverability of goodwill and other intangible assets with indefinite lives, management must make assumptions regarding estimated future cashflows and other factors to determine the fair value of the respective assets. If these estimates and related assumptions change in the future, we may be required torecord impairment charges not previously recorded. On January 1, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets, and are required toassess goodwill and intangible assets with indefinite lives for impairment at a minimum annually, using a two−step process that begins with an estimation of thefair value of the reporting unit. The first step is a screen for impairment, and the second step measures the amount of any impairment. These tests utilize fairvalue amounts that are determined by discounting estimated future cash flows developed by management. See Note 5, Goodwill and Other Intangible Assets, tothe consolidated financial statements for additional information.

Commitments and Contingencies

We are subject to lawsuits, investigations and other claims related to environmental, employment and other matters, as well as preference claims related toamounts received from customers prior to their seeking bankruptcy protection. Periodically, we review the status of each significant matter and assess potentialfinancial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue aliability for the estimated loss. Because of uncertainties related to these matters, accruals are based on the best information available at the time. As additionalinformation becomes available, we reassess the potential liability related to pending claims and may revise our estimates. See Note 8, Commitments andContingencies, to the consolidated financial statements for a description of certain legal proceedings.

Long−lived Assets

We are required to assess potential impairments of long−lived assets in accordance with SFAS No. 144, Accounting for Impairment of Long−Lived Assets, ifevents or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impaired asset is written down to its estimated fairvalue based upon the most recent information available. Estimated fair market value is generally measured by discounting estimated future cash flows developedby management. Long−lived assets that are held for disposal are recorded at the lower of the carrying value or the fair market value less the estimated cost to sell.Our long−lived assets primarily include property, plant and equipment and other noncurrent assets (primarily the costs of acquiring print contracts and volumeguarantees that are amortized to net sales over the periods in which benefits will be realized).

Investments in affordable housing, which are included in other noncurrent assets, are recorded at cost, as adjusted for our share of any declines in the fair value ofthe underlying properties that are deemed to be other than temporary. Our basis for determining fair value of the underlying properties requires applyingmanagement’s judgment using a significant number of estimates. We derive our estimates of fair value using remaining future tax credits to be received andexpected residual values upon sale or disposition of our ownership interests. Expected residual values are developed from industry assumptions and cash flowprojections provided by the underlying partnerships and include certain assumptions with respect to operating costs, debt

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Table of Contentslevels and certain market data related to the properties such as assumed vacancy rates. Should these assumptions differ from actual results in the future, we maybe required to further write down our carrying value of these investments. See Note 1, Summary of Significant Accounting Policies, and Note 3, Acquisitions andInvestments, to the consolidated financial statements for additional information.

Accounting for Income Taxes

Significant judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities, and any valuationallowance recorded against the deferred tax assets. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome isuncertain. Additionally, our tax returns are subject to audit by various domestic and foreign tax authorities. Although we believe that our estimates arereasonable, no assurance can be given that the final tax outcome will not be materially different from that which is reflected in our historical income taxprovisions and accruals.

We have recorded deferred tax assets related to domestic and foreign tax loss carryforwards. Limitations on the utilization of these tax assets may apply;accordingly, we have provided a valuation allowance to reduce certain of these deferred tax assets as we have concluded that, based on the weight of availableevidence, it is more likely than not that the deferred tax assets will not be fully realized. In the event that actual results differ from these estimates, or theestimates are adjusted in future periods, adjustments to the valuation allowance may need to be recorded.

It is the company’s policy to not record a tax benefit for net operating losses in countries with a limited net operating loss carry−forward period. Additionally, noprovision has been recorded on unremitted earnings which are considered to be indefinitely invested in non−U.S. subsidiaries.

Defined Benefit Retirement Plans

We present the status of our defined benefit obligations and related plan assets in Note 9, Retirement Plans, to the consolidated financial statements. Plan assets,which consist primarily of marketable equity securities and corporate and government fixed income securities, are valued using market quotations. Planobligations and annual pension and postretirement benefit income are determined by actuaries using a number of key assumptions. Key assumptions include thediscount rate, the estimated future return on plan assets, and the anticipated rate of future salary increases. We determine the discount rate to be used for purposesof computing annual income or expense as of the beginning of the year (using a measurement date of September 30), based on an index of high−quality corporatebond yields as of that date. The weighted average discount rates assumed for determining annual pension and postretirement income (expense) in 2003 were6.7% and 6.8%, respectively. We expect to lower the discount rates for purposes of determining both pension and postretirement income (expense) to 6.0% in2004 due to a decline in high−quality corporate bond yields as of September 30, 2003.

We determine the estimated return on plan assets primarily based on long−term historical returns of equity and fixed income markets according to our respectiveplan allocations. The weighted average expected asset return for our pension plans as of the end of 2003 was 8.9%. Plan assets for our pension plans aregenerally allocated as follows: domestic equity (70%); non−U.S. equity (20%) and fixed income securities (10%). By assuming historic returns of 10% for equityand 6% for fixed income securities as a benchmark, the weighted average expected return based on our pension plan asset allocation would be 9.6% comparedwith our assumed rate of 8.9%. While we have assumed no change in targeted asset allocation percentages for 2004, we intend to lower our expected long−termrate of return to 8.5% based on declines in equity market performance, primarily over the last three years, versus long−term historical averages.

The weighted average expected asset return for our postretirement benefit plans as of the end of 2003 was 8.5%. Plan assets for our postretirement benefit plansare generally allocated as follows: domestic equity (55%), non−U.S. equity (20%) and fixed income securities (25%). By assuming historic returns of 10% forequity and

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Table of Contents6% for fixed income securities, the weighted average expected return based on our postretirement benefit plan allocation would be 9.0%, compared with ourassumed rate of 8.5%. While we have assumed no change in asset allocation percentages for 2004, we intend to lower our expected long−term rate of return to8.0% based on declines in equity market performance, primarily over the last three years, versus long−term historical averages.

As a result of the expected assumption changes for 2004 as noted above, we anticipate pension and postretirement income to be reduced by approximately $22million in 2004. We expect to make approximately $17 million in cash contributions to our pension plans during 2004.

Other Matters

Other than non−cancelable operating lease commitments, we do not have off−balance sheet arrangements, financings, or other relationships with unconsolidatedentities or other persons, also known as “special purpose entities.” The consolidated financial statements include the accounts of the company and itsmajority−owned subsidiaries. Minority interests in the income or loss of consolidated subsidiaries are included in other income (expense) in the consolidatedincome statement. Intercompany items and transactions are eliminated in consolidation.

Financial Review

In the financial review that follows, we discuss our results of operations, financial condition and certain other information. This discussion should be read inconjunction with our consolidated financial statements and related notes that begin on page F−1.

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Table of ContentsItems Affecting Comparability of 2003 with 2002

The following significant items affect comparability of the consolidated statements of income and segment operating results for 2003 and 2002:

Year Ended December 31

2003 2002

EarningsbeforeIncome

Taxes

Net

Income

PerDiluted

Share

EarningsbeforeIncome

Taxes

Net

Income

PerDiluted

Share

In Thousands, except per−share dataAs reported $208,277 $176,509 $ 1.54 $175,733 $142,237 $ 1.24

Included in earnings from operations:Restructuring and impairment charges $ (16,427) $ (13,090) $(0.12) $ (88,929) $ (54,104) $(0.47)By−product revenues 47,796 28,677 0.25 46,093 27,656 0.24Gain on sale of assets 4,312 2,630 0.02 6,890 6,890 0.06Insurance recovery related to 9/11 2,047 1,228 0.01 1,600 960 0.01Provision for litigation — — — (16,000) (9,600) (0.08)Pension and postretirement income 311 280 — 19,907 11,944 0.10LIFO (provision) benefit (840) (504) — 4,800 2,880 0.03

37,199 19,221 0.16 (25,639) (13,374) (0.11)

Included in other income (expense):Affordable housing investment write−downs (23,250) (13,950) (0.12) (26,000) (15,600) (0.14)Gain on sale of businesses and investments 5,526 4,039 0.04 6,350 6,350 0.06COLI−related expenses upon policy surrender — — — (4,520) (2,712) (0.02)

(17,724) (9,911) (0.08) (24,170) (11,962) (0.10)

Included in tax benefit (provision):Tax benefit — 45,792 0.40 — 30,000 0.26

Total items affecting comparability $ 19,475 $ 55,102 $ 0.48 $ (49,809) $ 4,664 $ 0.05

Restructuring and impairment: Operating results for 2003 and 2002 were affected by the following restructuring and impairment charges:

• 2003 included pretax restructuring and impairment charges of $16 million ($13 million after−tax or $0.12 per diluted share). The 2003 pretax chargeincluded costs associated with newly−announced consolidations and workforce reductions, and costs associated with defined exit activities frompreviously announced restructuring plans. Included were impairment charges of $7 million ($7 million after−tax or $0.06 per diluted share) related tothe closure of a directory plant in Chile ($3 million) within the Other segment and a write−down of goodwill within the Logistics segment ($4 million).Restructuring and impairment charges for 2003 by segment were as follows: Print: $3 million; Logistics: $4 million; Financial: $3 million; and Other:$6 million.

• 2002 included pretax restructuring and impairment charges of $89 million ($54 million after−tax, or $0.47 per diluted share). The 2002 pretax chargeincluded $15 million to close our Berea, Ohio facility, which is included in the Print segment, as well as additional workforce reductions at severalother facilities throughout the company. Due to the magnitude of the workforce reductions that occurred in 2002, we recorded a pretax restructuringand impairment charge of $8 million in 2002 within the Corporate segment related to a curtailment loss on our postretirement benefit plans. In addition,we incurred certain

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Table of Contents

costs in 2002 associated with defined exit activities from previously announced restructuring plans. Restructuring and impairment charges for 2002 bysegment were as follows: Print: $55 million; Logistics: $2 million; Financial: $10 million; Corporate: $16 million and Other: $6 million.

For a further description of restructuring activities and cumulative activity since inception of the restructuring plans, see Note 4, Restructuring and Impairment,to the consolidated financial statements.

By−product revenues: 2003 included pretax income of $48 million for by−product revenues compared with $46 million in 2002. By−product revenues arerecorded as a reduction in our cost of materials, the majority of which relates to the Print segment.

Gain on sale of assets: 2003 included a $2 million pretax gain on the sale of our Casa Grande, Arizona manufacturing facility, and a $2 million pretax gain on thesale of land in the U.K., both included in the Print segment. 2002 included a $7 million pretax gain on the sale of our York, England manufacturing facilityfollowing the opening of our newly−constructed plant in Flaxby, England, included in the Print segment.

Insurance recovery related to 9/11: 2003 and 2002 both included a $2 million pretax gain from the collection of insurance proceeds from claims related toSeptember 11th, included in the Financial segment and recorded as a reduction in our cost of sales.

Provision for litigation: 2002 included a $16 million pretax provision for the settlement of certain litigation, included in the Corporate segment. See Note 8,Commitments and Contingencies, to the consolidated financial statements for further information.

Pension and postretirement income: 2003 included less than $1 million of pretax pension and postretirement income compared with $20 million of pretaxincome in 2002, primarily in the Corporate segment. The decline between years is primarily a result of changes in our assumptions for expected returns on planassets and our discount rate.

Affordable housing write−downs: 2003 included a pretax charge of $23 million to write down the carrying value of our investments in affordable housingcompared with a pretax charge of $26 million in 2002. The write−downs reflected declines in the underlying estimated fair value of our affordable housinginvestments and were included in the Corporate segment.

Gain on sale of businesses and investments: 2003 included a $4 million pretax gain related to the sale of our 25% equity investment in Global Directory ServicesCompany included in the Print segment and a $2 million pretax gain related to the sale of our cost basis investment in MultiMedia Live included in the Corporatesegment. 2002 included a $6 million pretax gain from the collection of a note receivable that had been previously reserved in connection with the sale of ourinvestment in Modus Media International (MMI) in 1999, included in the Corporate segment.

COLI−related expenses upon policy surrender: 2002 included a $5 million pretax charge for expenses related to the surrender of certain corporate−owned lifeinsurance (COLI) policies in conjunction with our settlement with the Internal Revenue Service (IRS) for disputed COLI deductions; see Note 10, Income Taxes,to the consolidated financial statements for further information.

Tax benefit: 2003 included a tax benefit of $46 million, the largest component of which was a non−cash benefit of $40 million due to the favorable resolution ofIRS audits for 1996 through 1999. In addition, we recorded a $6 million receivable related to refundable income taxes in Latin America due to the utilization oftax loss carrybacks. 2002 included a non−cash benefit of $30 million related to our settlement with the IRS for disputed COLI deductions; see Note 10, IncomeTaxes, to the consolidated financial statements for further information.

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Table of ContentsResults of Operations—2003 compared with 2002

Consolidated net sales increased $32 million, or 0.7%, between years to $4.8 billion in 2003, driven by an increase in net sales of our Logistics segment of 16.5%and International of 20.1% included within our Other segment, partially offset by a decline in net sales of our Print segment of 4.4%. Net sales of our Logisticssegment increased $129 million between years, which reflected higher net sales across both our print and package logistics businesses. The acquisition of MLI inMarch 2003 within the package logistics business contributed an incremental $49 million in net sales between years.

For our print−related businesses, value−added revenue represents net sales less the cost of materials. For some customers, we purchase paper used in the printingprocess and pass through this cost (referred to as “pass through material sales”) at a margin that is lower than print and related services; other customers furnishtheir own paper. The value of customer−furnished paper is not reflected in our financial results. For our Logistics segment, value−added revenue represents netsales less the cost of transportation and postage. By measuring value−added revenue, we eliminate the effects of material prices and transportation and postagecost, as well as mix issues related to customer−furnished versus RR Donnelley−furnished paper. Management, therefore, views value−added revenue as apreferable performance measure of its own value−added products and services. Other companies may use a measure which is calculated in a similar manner, butwhich may not be comparable.

Consolidated value−added revenue increased $14 million, or 0.5%, to $2.8 billion in 2003, driven by an increase in value−added revenue of our Logisticssegment of 27.6% and International of 21.6% included within our Other segment, partially offset by a decline in value−added revenue of our Print segment of2.9%. Value−added revenue of our Logistics segment increased $52 million between years, primarily due to an incremental $43 million in value−added revenuefrom our acquisition of MLI. The Print segment’s decline in value−added revenue of 2.9% was less than the decline in net sales primarily due to highercustomer−furnished paper and improved material yield in 2003.

Value−added revenue is also affected by the price of by−product paper we sell. Income from the sale of by−products is recorded as a reduction in our cost ofmaterials. In 2003, we recognized a reduction in cost of materials of $48 million from by−product revenues, compared with a reduction of $46 million a year ago.

Gross profit as a percentage of net sales (gross margin) was 17.5% in 2003 compared with 18.2% in 2002, primarily due to declines in gross margin of ourLogistics and Print segments, partially offset by a higher gross margin at our Financial segment. The Logistics segment has a lower gross margin than the Printsegment and represented a higher proportion of our net sales in 2003 (19.1% in 2003 versus 16.5% in 2002). The Logistics segment’s gross margin decreasedbetween years, primarily due to start−up costs associated with a new consolidation facility in the Northeast ($9 million), the impact of the MLI acquisition ($8million) and a product mix shift to lighter−weight packages. The Print segment’s gross margin was negatively impacted in 2003 primarily by price deteriorationand unfavorable work mix, as well as lower gains on asset sales ($3 million), partially offset by higher volume and the impact of restructuring savings andproductivity initiatives. The Financial segment’s gross margin increased between years, due to a mix shift toward higher margin capital markets work and theimpact of restructuring savings and cost reduction initiatives.

Selling and administrative expenses increased $15 million between years, or 2.8%, to $548 million in 2003. Compared with 2002, a higher provision for doubtfulaccounts ($7 million, of which $5 million related to Latin America), increased costs to support sales growth in Europe ($7 million), lower benefit plan earnings($4 million), incremental selling and administrative expenses related to the MLI acquisition ($2 million), and higher volume−based sales incentives(commissions) were partially offset by lower management incentive compensation ($1 million) and restructuring−related savings and cost reduction initiatives.Selling and administrative expenses as a percentage of net sales was 11.5% in 2003, compared with 11.2% in 2002.

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Table of ContentsNet interest expense decreased $12 million, or 19.8%, in 2003, primarily due to lower effective interest rates and lower average borrowings as compared with theprior year. Other expense, net, was $12 million in 2003 compared with $6 million in 2002. The primary components of other expense, net, in 2003 were asfollows: affordable housing write−downs ($23 million) and foreign currency transaction losses, net ($1 million), partially offset by earnings from investments ($3million), gain on sale of businesses and investments ($6 million) and other miscellaneous income ($3 million). The primary components of other expense, net, in2002 were as follows: affordable housing write−downs ($26 million) and foreign currency transaction losses, net ($3 million), partially offset by earnings frominvestments ($6 million), gain on sale of businesses and investments ($6 million) and other miscellaneous income ($11 million).

Earnings before income taxes in 2003 were $208 million compared with $176 million in 2002. Earnings before income taxes included $16 million and $89million in restructuring and impairment charges for 2003 and 2002, respectively, and the other significant items affecting comparability as noted above. Theeffective tax rate in 2003 was 15.3% compared with 19.1% in 2002. The lower 2003 effective tax rate reflected a tax benefit of $46 million, including a non−cashbenefit of $40 million due to favorable resolution of IRS audits for 1996 through 1999. In addition, we recorded a $6 million receivable for refundable incometaxes in Latin America due to the utilization of tax loss carrybacks. The 2002 effective tax rate included a $30 million tax benefit related to our settlement withthe IRS surrounding our COLI program (see Note 10, Income Taxes, to the consolidated financial statements). Net income was $177 million, up $35 million from$142 million in 2002. Diluted earnings per share of $1.54 increased $0.30 from $1.24 in 2002.

A summary analysis of expense trends is presented below:

2003 2002 % Change

Dollars in ThousandsCost of materials $ 1,339,064 $ 1,398,944 (4.3)%Cost of transportation 677,997 599,569 13.1Cost of manufacturing * 1,666,832 1,610,118 3.5Depreciation 276,005 288,499 (4.3)Amortization ** 53,354 63,873 (16.5)Selling and administrative expenses * 539,913 523,388 3.2Restructuring and impairment charges 16,427 88,929 (81.5)Net interest expense 50,359 62,818 (19.8)

* Excludes depreciation and amortization, which are shown separately.** Includes write−downs of affordable housing investments classified as other expense, net, of $23 million and $26 million in 2003 and 2002, respectively.

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Table of ContentsOperating Results by Business Segment—2003 compared with 2002

As discussed more fully in Note 18, Industry Segment Information, to the consolidated financial statements, we have three reportable segments: Print, Logisticsand Financial.

The following table shows the trends in net sales and value−added revenue by end market for each of our segments:

Net Sales Value−Added Revenue

2003 2002 % Change 2003 2002 % Change

Dollars in ThousandsMagazines, Catalogs and Retail $ 1,543,075 $ 1,585,421 (2.7%) $ 963,514 $ 990,890 (2.8%)Book 663,273 705,390 (6.0%) 480,312 509,416 (5.7%)Telecommunications 632,184 679,422 (7.0%) 344,193 341,861 0.7%Premedia 117,876 120,942 (2.5%) 117,876 120,948 (2.5%)

Print 2,956,408 3,091,175 (4.4%) 1,905,895 1,963,115 (2.9%)

Logistics 913,207 784,024 16.5% 238,747 187,146 27.6%Financial 426,231 427,453 (0.3%) 361,379 362,602 (0.3%)Direct Mail 112,360 138,776 (19.0%) 68,772 82,229 (16.4%)Other (1) 378,956 313,509 20.9% 195,308 161,332 21.1%

Total Other 491,316 452,285 8.6% 264,080 243,561 8.4%

Total 4,787,162 4,754,937 0.7 % $ 2,770,101 $ 2,756,424 0.5%

Cost of materials and transportation 2,017,061 1,998,513

Value−added revenue $ 2,770,101 $ 2,756,424

(1) Includes International (Latin America, Europe and Asia) and Other. Other international locations are included within the respective end markets.

Operating results by business segment for 2003 compared with 2002 are as follows:

Print Segment

The following table summarizes significant items affecting comparability within the Print segment:

2003 2002

Earnings (loss) before

Income Taxes

Thousands of dollarsAs reported $312,579 $315,593

Included in earnings from operations:Restructuring and impairment charges $ (2,782) $ (54,645)By−product revenues 40,943 40,266Gain on sale of assets 3,720 6,943

41,881 (7,436)Included in other income (expense):Gain on sale of businesses and investments 4,078 —

Total items affecting comparability $ 45,959 $ (7,436)

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Table of ContentsNet sales for our Print segment decreased $135 million in 2003, or 4.4%, from 2002. Net sales for Magazines, Catalogs and Retail decreased $42 million, or2.7%, between years, primarily reflecting price deterioration and a mix shift to work with a lower price per unit, partially offset by higher volume. The economicslowdown that began in 2000 generated excess industry capacity from reduced demand levels and higher customer bankruptcies resulting in increasedcompetition and pricing pressures. Lower contract prices on renewals have continued to cycle through our 2003 results. The net sales decline of 2.5% inPremedia was driven by these same factors. Net sales of our Book business were down $42 million, or 6.0%, between years, due to lower volumes includingfewer reprint orders, lower average prices and a less favorable mix of more soft−cover books with a lower price per unit and fewer case−bound books. Net salesfor Telecommunications were down $47 million, or 7.0%, between years, primarily due to more customer−furnished paper and lower average prices, partiallyoffset by higher volume.

Value−added revenue for our Print segment decreased $57 million, or 2.9%, from 2002, primarily due to the net sales declines noted above, partially offset byimproved material yield which lowered material costs. Value−added revenue for Telecommunications increased 0.7% between years because of higher volume,as noted above, and favorable foreign currency exchange rates on U.K. directory work that more than offset price declines. This occurred despite a 7.0% decreasein net sales because the portion of the decline in net sales due to more customer−furnished paper had no significant impact on value−added revenue.

Earnings from operations in 2003 for our Print segment increased $3 million, or 1.0%, from 2002. Earnings from operations included $3 million in restructuringand impairment charges for 2003 compared with $55 million in 2002. Our Print segment has not yet begun to see the positive effects of an economic recovery.The negative impact on earnings due to price deterioration and a mix shift to lower margin work as noted above was only partially offset by higher volumes in2003 and the impact of productivity initiatives and savings related to restructuring actions.

Logistics Segment

The following table summarizes significant items affecting comparability within the Logistics segment:

2003 2002

Earnings (loss) before

Income Taxes

Thousands of dollarsAs reported $(11,158) $11,049

Included in earnings from operations:Restructuring and impairment charges $ (3,736) $ (2,349)

Total items affecting comparability $ (3,736) $ (2,349)

Net sales for our Logistics segment increased $129 million, or 16.5%, from a year ago. Net sales of package logistics were up $97 million, or 19.0%, betweenyears. The acquisition of MLI in March 2003 contributed an incremental $49 million in net sales for package logistics between years. Net sales for packagelogistics excluding MLI were up 9.3% for 2003 due to higher volumes and postal rate increases which were passed through to customers, partially offset by amix change toward lighter−weight, lower−priced packages. Net sales of print logistics were up 15.1% for 2003, driven by higher volumes from both our Printsegment and from third parties for which we do not provide printing services.

Value−added revenue for our Logistics segment increased $52 million, or 27.6%, between years, of which $43 million related to the acquisition of MLI.Excluding the acquisition of MLI, value−added revenue for our package logistics business was flat between years, despite a 9.3% increase in net sales. Inaddition to the factors affecting net sales noted above, value−added revenue of our package logistics business was negatively impacted

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Table of Contentsin 2003 by higher transportation costs, partially offset by higher postage discounts due to deeper penetration of the postal system. Higher transportation costsbetween years were driven by transportation rate increases and higher fuel costs. In addition, higher costs in 2003 resulted from start−up problems at aconsolidation facility in the Northeast, which led to the re−routing of packages to other company facilities. These start−up problems were not fully resolved bythe fourth quarter of 2003, which is the peak time for package delivery. The company has taken actions to address these start−up problems, and expects to seesignificant improvements in operational efficiencies at this facility beginning in early 2004. Value−added revenue for our print logistics business increased11.0% between years, driven by higher net sales, partially offset by higher per−unit transportation costs.

Excluding the impact of the MLI acquisition, the percentage of value−added revenue to net sales for our Logistics segment was 22.7% in 2003, down from23.9% in 2002. MLI had a significantly higher value−added revenue to net sales percentage (86.2%) in 2003. Unlike the rest of our Logistics segment, MLI ownsand operates a dedicated fleet of vehicles to provide package distribution services. MLI’s value−added revenue was a higher percentage of its net sales becausethese internal operating and distribution costs are included in total cost of sales rather than cost of transportation (which consists of third−party freight costs).

In 2003, our Logistics segment incurred a loss from operations of $11 million, compared with earnings from operations of $11 million in 2002. The loss fromoperations in 2003 included a $13 million loss from MLI since its acquisition date of March 2003. The MLI loss included a pretax impairment charge of $4million to write down goodwill, as the estimated future cash flows for this business were not expected to be sufficient to fully recover its carrying value. In earlyFebruary 2004, we closed MLI’s business−to−business package delivery operations due to poor performance and significant operating losses incurred, whileretaining the business−to−consumer operations that complement our base package logistics business. Of the total $13 million operating loss in 2003 from MLI,approximately $7 million related to the business−to−business package delivery operations.

Excluding MLI, the loss from operations for our Logistics segment in 2003 was attributable to operational issues within our package logistics business, partiallyoffset by the improved performance of print logistics. Our package logistics business was hurt in 2003 by start−up costs of approximately $9 million related toour new consolidation facility in the Northeast. In addition to higher transportation costs to re−route packages noted above, we operated a second nearby facilitylonger than originally anticipated as an operational contingency for the start−up problems. This second facility was closed in January 2004.

Financial Segment

The following table summarizes significant items affecting comparability within the Financial segment:

2003 2002

Earnings (loss) before

Income Taxes

Thousands of dollarsAs reported $ 3,210 $(31,544)

Included in earnings from operations:Restructuring and impairment charges $(2,815) $(10,499)By−product revenues 1,332 1,313Insurance recovery related to 9/11 2,047 1,600

Total items affecting comparability $ 564 $ (7,586)

2003 net sales for our Financial segment decreased $1 million, or 0.3%, from a year ago. Net sales from customized communications solutions decreased 5.9%between years, mostly offset by an increase in capital markets net sales of 3.8%. The 2003 decline in net sales from customized communication solutions wasprimarily due to lower net sales from investor communications (e.g., prospectuses, annual and semi−annual mutual funds

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Table of Contentsstatements), which reflected contraction in the mutual fund market and one large non−recurring deal in 2002. The increase in capital markets net sales betweenyears was driven by a rebound within the domestic capital markets in the second half of 2003 following a period of economic slowdown, and higher fourthquarter 2003 international net sales. Domestic capital markets net sales in 2003 were essentially flat between years, which reflected higher compliance filings(e.g., SEC periodic reports and annual meeting proxy statements), mostly offset by lower transactional activity in the first half of the year (e.g., S−filings,including initial public offerings, secondary offerings and mergers and acquisitions).

Value−added revenue for our Financial segment in 2003 decreased $1 million, or 0.3%, from the prior year, consistent with the decline in net sales.

Earnings from operations for our Financial segment in 2003 were $4 million compared with a loss from operations in 2002 of $33 million. Included in 2003earnings from operations were restructuring and impairment charges of $3 million consisting primarily of workforce reductions, down $8 million from the prioryear. Prior−year restructuring actions included the closing of several print facilities and service centers, and related workforce reductions. Earnings fromoperations in 2003 were also impacted favorably by restructuring savings of approximately $16 million between years, of which $13 million related to workforcereductions and $3 million to lower depreciation. In addition, earnings from operations in 2003 benefited from cost reduction initiatives of approximately $10million, including savings from the outsourcing of certain composition−related services offshore. Operating margins in 2003 also reflected a favorable mixchange between years due to increased capital markets activity in 2003, which carries higher operating margins than customized communications solutions.

Other and Corporate Segments

The following table summarizes significant items affecting comparability within the Other and Corporate segments:

2003 2002

Earnings (loss) beforeIncome Taxes

Thousands of dollarsAs reported $(96,354) $(119,365)

Included in earnings from operations:Restructuring and impairment charges $ (7,094) $ (21,436)By−product revenues 5,521 4,514Pension and postretirement income (1) 311 19,907LIFO (provision) benefit (840) 4,800Provision for litigation — (16,000)

(2,102) (8,215)

Included in other income (expense):Gain on sale of businesses and investments 1,448 6,350Affordable housing investment write−downs (23,250) (26,000)COLI−related expenses upon policy surrender — (4,520)

(21,802) (24,170)

Included in tax benefit (provision):Tax benefit 45,792 30,000

Total items affecting comparability $ 21,888 $ (2,385)

(1) Excludes service costs, which are recorded primarily within the Print, Logistics and Financial segments.

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Table of Contents2003 net sales for the Other segment increased $39 million, or 8.6%, from a year ago. International net sales in 2003 were up $63 million, or 20.1%, from theprior year, driven by increases in Europe due to volume growth and favorable foreign currency exchange rates, as well as volume growth in Asia, partially offsetby lower net sales in Latin America. 2003 net sales for Direct Mail were down $26 million, or 19.0%, from the prior year, driven by lower volume. Included innet sales within the Other segment were $2 million from a start−up operation which was shut−down during the fourth quarter of 2003.

Value−added revenue for the Other segment increased $21 million, or 8.4%, from a year ago, consistent with the increase in net sales.

The 2003 loss from operations for the Other segment was $38 million compared with a loss from operations of $27 million in 2002. The loss from operations forInternational in 2003 was higher than the prior year, primarily due to lower volume and an additional $5 million provision for doubtful accounts in LatinAmerica; additional start−up costs of a plant in Shanghai, China; and higher restructuring costs of $1 million, partially offset by higher volumes and favorableforeign currency exchange rates in Europe. The loss from operations for Direct Mail in 2003 was higher than the prior year, primarily due to lower volume,partially offset by savings from restructuring actions.

Earnings from operations for the Corporate segment were $8 million in 2003 compared with a loss from operations of $10 million in 2002. Higher earnings fromoperations of $18 million in the Corporate segment between years were due to the following: lower restructuring and impairment charges ($15 million); lowerprovision for litigation ($16 million); lower management incentive compensation ($9 million); and lower miscellaneous expenses ($2 million), partially offset bylower benefit plan earnings (excluding service costs allocated to the segments) ($18 million); and a higher LIFO provision ($6 million).

For a reconciliation of earnings from operations to earnings before income taxes by segment, see Note 18, Industry Segment Information, to the consolidatedfinancial statements.

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Table of ContentsItems Affecting Comparability of 2002 with 2001

The following significant items affect comparability of the consolidated statements of income and segment operating results for 2002 and 2001:

Year Ended December 31

2002 2001

EarningsbeforeIncome

Taxes

Net

Income

PerDiluted

Share

EarningsbeforeIncome

TaxesNet

Income

PerDiluted

Share

In Thousands, except per−share dataAs reported $175,733 $142,237 $ 1.24 $ 74,894 $ 24,988 $ 0.21

Included in earnings from operations:Restructuring and impairment charges $ (88,929) $ (54,104) $(0.47) $(195,545) $(136,752) $(1.15)By−product revenues 46,093 27,656 0.24 40,964 24,578 0.21Gain on sale of assets 6,890 6,890 0.06 — — — Insurance recovery related to 9/11 1,600 960 0.01 — — — Provision for litigation (16,000) (9,600) (0.08) — — — Goodwill amortization — — — (16,092) (12,018) (0.10)Pension and postretirement income 19,907 11,944 0.10 36,034 21,620 0.18LIFO benefit (provision) 4,800 2,880 0.03 (3,500) (2,100) (0.02)

(25,639) (13,374) (0.11) (138,139) (104,672) (0.88)

Included in other income (expense):Affordable housing investment write−downs (26,000) (15,600) (0.14) (8,400) (5,040) (0.04)Gain on sale of businesses and investments 6,350 6,350 0.06 6,641 6,641 0.05Other investment write−downs — — — (18,536) (18,536) (0.16)Goodwill amortization — — — (1,491) (1,375) (0.01)COLI−related expenses upon policy surrender (4,520) (2,712) (0.02) — — —

(24,170) (11,962) (0.10) (21,786) (18,310) (0.16)

Included in tax benefit (provision):Tax benefit — 30,000 0.26 — — —

Total items affecting comparability $ (49,809) $ 4,664 $ 0.05 $(159,925) $(122,982) $(1.04)

Restructuring and impairment: Operating results for 2002 and 2001 were affected by the following restructuring and impairment charges:

• 2002 included pretax restructuring and impairment charges of $89 million ($54 million after−tax, or $0.47 per diluted share). The 2002 pretaxcharge included $15 million to close our Berea, Ohio facility, which is included in the Print segment, as well as additional workforce reductions atseveral other facilities throughout the company. Due to the magnitude of the workforce reductions that occurred in 2002, we recorded a pretaxrestructuring and impairment charge of $8 million in 2002 within the Corporate segment related to a curtailment loss on our postretirement benefitplan. In addition, we incurred costs in 2002 associated with defined exit activities from previously announced restructuring plans. Restructuring andimpairment charges for 2002 by segment were as follows: Print: $55 million; Logistics: $2 million; Financial: $10 million; Corporate: $16 millionand Other: $6 million.

• 2001 included pretax restructuring and impairment charges of $196 million ($137 million after−tax, or $1.15 per diluted share). The 2001 pretaxcharge included $106 million related to various restructuring

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Table of Contents

actions and $90 million related to write−downs to adjust the carrying values of certain businesses. During 2001, we announced the closure of fourU.S. manufacturing operations within the Print segment and print−production at a Financial sales center. In addition, in 2001 we announced theclosure of two international operations both included in the Other segment. The $106 million pretax charge for 2001 by segment was as follows:Print: $86 million; Logistics: $1 million; Financial: $8 million; Corporate: $4 million and Other: $7 million. Also during 2001, in accordance withSFAS No. 121, Accounting for the Impairment of Long−Lived Assets to be Disposed of, we recorded a pretax impairment charge of $90 million toadjust the carrying values of certain businesses to fair value. The $90 million pretax charge for 2001 by segment was as follows: Print: $11 millionand Other: $79 million.

For a further description of restructuring activities and cumulative activity since inception of the restructuring plans, see Note 4, Restructuring and Impairment,to the consolidated financial statements.

By−product revenues: 2002 included pretax income of $46 million for by−product revenues compared with $41 million in 2001. By−product revenues arerecorded as a reduction in our cost of materials, the majority of which relates to the Print segment.

Gain on sale of assets: 2002 included a $7 million pretax gain on the sale of our York, England manufacturing facility following the opening of ournewly−constructed plant in Flaxby, England, included in the Print segment.

Insurance recovery related to 9/11: 2002 included a $2 million pretax gain from the collection of insurance proceeds from claims related to September 11th,included in the Financial segment and recorded as a reduction in our cost of sales.

Provision for litigation: 2002 included a $16 million pretax provision for the settlement of certain litigation, included in the Corporate segment. See Note 8,Commitments and Contingencies, to the consolidated financial statements for further information.

Impact of Goodwill Amortization: As discussed in Note 5, Goodwill and Other Intangible Assets, to the consolidated financial statements, we adopted SFASNo. 142, Goodwill and Other Intangible Assets, as of January 1, 2002. Under SFAS No. 142, goodwill is no longer amortized after the date of adoption of thestandard. SFAS No. 142 does not permit the restatement of previously issued financial statements, but does require disclosure of the impact on prior resultsadjusted to exclude amortization expense related to goodwill and intangible assets which are no longer being amortized. 2001 results included $18 million ($13million after−tax, or $0.11 per diluted share) of goodwill amortization expense. Goodwill amortization expense by segment for 2001 was as follows: Print: $5million; Logistics: $8 million; Financial: $1 million and Other: $4 million.

Pension and postretirement income: 2002 included $20 million pretax pension and postretirement income compared with $36 million of pretax income in2001. The decline between years is primarily a result of changes in our assumptions for expected returns on plan assets and our discount rate.

Affordable housing write−downs: 2002 included a pretax charge of $26 million to write down the carrying value of our investments in affordable housingcompared with a pretax charge of $8 million in 2001. The write− downs reflected declines in the underlying estimated fair value of our affordable housinginvestments and were included in the Corporate segment.

Gain on sale of businesses and investments: 2002 included a $6 million pretax gain from the collection of a note receivable that had been previously reserved inconnection with the sale of our investment in MMI in 1999, which was included in the Corporate segment. 2001 included a pretax gain of $7 million related tothe sale of our remaining interest in Stream and was included in the Other segment.

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Table of ContentsOther investment write−downs: 2001 included a pretax loss of $19 million on the write−down of several Internet technology−related investments and wasincluded in the Other segment.

COLI−related expenses upon policy surrender: 2002 included a $5 million pretax charge for expenses related to the surrender of certain corporate−owned lifeinsurance (COLI) policies in conjunction with our settlement with the IRS for disputed COLI deductions; see Note 10, Income Taxes, to the consolidatedfinancial statements for further information.

Tax benefit: 2002 included an after−tax benefit of $30 million from the settlement with the IRS on COLI; see Note 10, Income Taxes, to the consolidatedfinancial statements for further information.

Results of Operations—2002 compared with 2001

Consolidated net sales decreased $543 million, or 10.2%, to $4.8 billion compared with $5.3 billion in 2001, driven by the decline in net sales of our Printsegment of 11.8%. Net sales of our Logistics segment were up 1.1% between years, with an 8.3% increase in net sales for the package logistics business partiallyoffset by a decrease of 7.8% in net sales from print logistics.

Consolidated value−added revenue decreased $244 million, or 8.1%, to $2.8 billion compared with $3.0 billion in 2001, primarily driven by the decline invalue−added revenue of our Print segment of 8.4%. Our Print segment’s percentage decline in value−added revenue was less than the decline in net sales,primarily due to higher customer−furnished paper and improved material yield during 2002. In addition, value−added revenue is affected by the price ofby−product paper we sell. Income from the sale of by−products is recorded as a reduction in cost of materials. During 2002, we recognized a reduction in cost ofmaterials of $46 million from by−product revenues, compared with $41 million a year ago. Value−added revenue of our Logistics segment increased 11.3%between years, due to a 21.2% increase in value−added revenue for package logistics.

Gross profit as a percentage of net sales (gross margin) was 18.2% in 2002 compared with 17.2% in 2001, primarily due to higher gross margins within our Printsegment, partially offset by the net effect of several significant items within the Corporate segment. Our Print segment’s gross margin in 2002 benefited fromrestructuring and productivity gains, the impact of lower goodwill amortization ($5 million), higher by−product revenues ($5 million) and gain on sale of assets($7 million), which more than offset the gross margin impact from lower net sales. Our Logistics segment’s gross margin increased between years, driven by theimproved performance of both package and print logistics, and lower goodwill amortization ($8 million). Negatively impacting gross margin in 2002 within theCorporate segment was a provision for litigation ($16 million), partially offset by a lower LIFO provision ($8 million).

Selling and administrative expenses decreased $34 million, or 6.0%, to $534 million compared with $568 million in 2001. Reductions in volume−based salesincentives (commissions), restructuring savings from workforce reductions, lower bad debt expense ($11 million), and lower spending to build complementarybusinesses ($16 million) in 2002 were partially offset by higher management incentive compensation expense ($5 million), higher expenses to build marketingcapabilities ($8 million) and higher benefit expenses, including medical, pension and postretirement benefit costs. Selling and administrative expenses as apercentage of net sales was 11.2% in 2002 compared with 10.7% in 2001.

Net interest expense decreased 11.8% to $63 million in 2002, primarily due to lower effective interest rates on outstanding debt. Other expense, net, was $6million in 2002 compared with $1 million in 2001. The primary components of other expense, net, in 2002 were as follows: affordable housing write−downs($26 million) and foreign currency transaction losses, net ($3 million), partially offset by earnings from investments ($6 million), gain on sale of businesses andinvestments ($6 million) and other miscellaneous income ($11 million). The primary components of other expense, net, in 2001 were as follows: otherinvestment write−downs ($19 million);

28

Table of Contentsaffordable housing write−downs ($8 million) and foreign currency transaction losses, net, ($5 million), partially offset by gain on sale of businesses andinvestments ($7 million) and other miscellaneous income ($24 million).

Earnings before income taxes in 2002 were $176 million compared with $75 million in 2001. Earnings before income taxes included $89 million and $196million in restructuring and impairment charges for 2002 and 2001, respectively, and the other significant items affecting comparability as noted above. Theeffective tax rate in 2002 was 19.1% compared with 66.6% in 2001. The 2002 effective tax rate included a $30 million tax benefit related to our settlement withthe IRS surrounding our COLI program (see Note 10, Income Taxes, to the consolidated financial statements); in 2001, certain one time items included in netincome did not have an associated income tax provision or benefit. Net income was $142 million, up $117 million from $25 million in 2001. Diluted earnings pershare of $1.24 increased $1.03 from $0.21 in 2001.

A summary analysis of expense trends is presented below:

2002 2001 % Change

Dollars in ThousandsCost of materials $ 1,398,944 $ 1,689,882 (17.2)%Cost of transportation 599,569 607,389 (1.3)Cost of manufacturing * 1,610,118 1,769,712 (9.0)Depreciation 288,499 315,937 (8.7)Amortization ** 63,873 62,786 1.7Selling and administrative expenses * 523,388 554,914 (5.7)Restructuring and impairment charges 88,929 195,545 (54.5)Net interest expense 62,818 71,183 (11.8)

* Excludes depreciation and amortization, which are shown separately.** Includes write−downs of affordable housing investments classified as other expense, net, of $26 million and $8 million in 2002 and 2001, respectively.

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Table of ContentsOperating Results by Business Segment—2002 compared with 2001

As discussed more fully in Note 18, Industry Segment Information, to the consolidated financial statements, we have three reportable segments: Print, Logisticsand Financial.

The following table shows the trends in net sales and value−added revenue by end market for each of our segments:

Net Sales Value−Added Revenue

2002 2001 % Change 2002 2001 % Change

Dollars in ThousandsMagazines, Catalogs and Retail $ 1,585,421 $ 1,876,555 (15.5)% $ 990,890 $ 1,154,068 (14.1)%Book 705,390 708,380 (0.4) 509,416 498,086 2.3Telecommunications 679,422 777,383 (12.6) 341,861 348,408 (1.9)Premedia 120,942 141,473 (14.5) 120,948 141,473 (14.5)

Print 3,091,175 3,503,791 (11.8) 1,963,115 2,142,035 (8.4)

Logistics 784,024 775,518 1.1 187,146 168,130 11.3Financial 427,453 493,563 (13.4) 362,602 416,045 (12.8)Direct Mail 138,776 179,330 (22.6) 82,229 98,943 (16.9)Other (1) 313,509 345,558 (9.2) 161,332 175,336 (7.9)

Total Other 452,285 524,888 (13.8) 243,561 274,279 (11.2)

Total 4,754,937 5,297,760 (10.2)% $ 2,756,424 $ 3,000,489 (8.1)%

Cost of materials and transportation 1,998,513 2,297,271

Value−added revenue $ 2,756,424 $ 3,000,489

(1) Includes International (Latin America, Europe and Asia) and Other. Other international locations are included within the respective end markets.

Operating results by business segment for 2002 compared with 2001 are as follows:

Print Segment

The following table summarizes significant items affecting comparability within the Print segment:

2002 2001

Earnings (loss) before

Income Taxes

Thousands of dollarsAs reported $315,593 $283,636

Included in earnings from operations:Restructuring and impairment charges $ (54,645) $ (97,222)By−product revenues 40,266 34,847Gain on sale of assets 6,943 — Goodwill amortization — (4,621)

Total items affecting comparability $ (7,436) $ (66,996)

Net sales for our Print segment decreased $413 million in 2002, or 11.8%, from 2001. Net sales in Magazines, Catalogs and Retail decreased 15.5% betweenyears, which primarily reflected volume decreases and price deterioration across all major markets. The continued economic slowdown during 2002 resulted inlower volumes

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Table of Contentsand more customer bankruptcies within the Catalog and Retail markets, and lower advertising pages for both trade and consumer magazines. The net salesdecline in Premedia was driven by these same factors. Depressed volumes in these markets drove increased competition and pricing pressures, and certaincustomer work lost due to bankruptcy or other factors was replaced with lower−priced work. Net sales in our Book business were relatively flat between yearsdue to volume decreases in the religious and specialty markets and more customer−furnished paper, offset by volume increases in the consumer and educationmarkets. Net sales for Telecommunications were down 12.6% between years, primarily due to a shift to more customer−furnished paper.

Value−added revenue for our Print segment decreased $179 million, or 8.4%, from 2001, primarily due to volume declines and price deterioration within theMagazines, Catalogs and Retail markets, as well as Premedia. Value−added revenue for Magazines, Catalogs and Retail and Premedia declined 14.1% and14.5%, respectively, between years, consistent with the declines in net sales. Value−added revenue for Book increased 2.3% compared with 2001 due toincreases in the consumer and educational markets, partially offset by declines in the religious and specialty markets. Value−added revenue forTelecommunications decreased 1.9% between years, which was less than the percentage decline in net sales, because the decline in net sales due to morecustomer−furnished paper had no significant impact on value−added revenue, as well as improved material yield.

Earnings from operations for our Print segment increased $36 million, or 13.5% from 2001. Earnings from operations included $55 million and $97 million ofrestructuring and impairment charges for 2002 and 2001, respectively. Earnings from operations in 2002 continued to be negatively affected by the slowdown inthe U.S. economy, particularly in Magazines, Catalogs and Retail. During 2001, we announced actions to better align our cost structure that included the closingof four print facilities within our Print segment. All four of these print facilities, along with our Berea, Ohio printing facility, were closed by the end of thesecond quarter of 2002 (see discussion under the caption Restructuring, Impairment and Other Items below). The 2002 impact of productivity initiatives andsavings from actions we took to restructure our operations largely offset the effects of volume declines and price erosion on earnings from operations. Alsoincluded in earnings from operations in 2002 were lower corporate assessments ($10 million) and lower selling and administrative expenses ($7 million) due to adecrease in management incentive compensation and reduced volume−based selling incentives.

Logistics Segment

The following table summarizes significant items affecting comparability within the Logistics segment:

2002 2001

Earnings (loss) before

Income Taxes

Thousands of dollarsAs reported $11,049 $(4,266)

Included in earnings from operations:

Restructuring and impairment charges $ (2,349) $ (672)Goodwill amortization — (8,160)

Total items affecting comparability $ (2,349) $(8,832)

Net sales for our Logistics segment increased $9 million, or 1.1%, from a year ago. Net sales of print logistics were down 7.8% for 2002, driven by lowervolumes from a continued slow economy. Net sales of package logistics were up 8.3% between years. Unit volumes for package logistics were up 26.1%between years, which were partially offset by a mix change toward lighter weight, lower−priced packages. Net sales for 2002 for package logistics were alsoimpacted by our decision to cease serving several large mailers during 2001 because of price levels that proved unprofitable.

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Table of ContentsValue−added revenue for our Logistics segment increased $19 million, or 11.3%, from 2001. Value−added revenue for package logistics increased 21.2%between years, driven by increased postage discounts due to deeper penetration of the postal system (closer to the final destination) and lower per−unittransportation costs. Results for package logistics in 2001 were hurt by a higher relative level of large mailers at price levels that proved to be unprofitable.Actions taken throughout 2001 to raise prices and adjust work mix had a positive impact on package logistics’ value−added revenue in 2002. Value−addedrevenue for print logistics was flat between years, primarily due to a reduction in per−unit transportation costs driven by operational efficiencies and improvedvendor management, which offset volume declines.

Earnings from operations for 2002 for our Logistics segment were $11 million compared with a loss from operations of $5 million a year ago. This improvedperformance was driven by higher value−added revenue from the package logistics business due to the factors noted above, along with lower goodwillamortization of $8 million. Earnings from operations for the print logistics business increased between years as a result of transportation cost savings notedabove, and improved margins in 2002 following start−up problems in a distribution center in the Northeast during the fourth quarter of 2000 that continued intoearly 2001. Earnings from operations in 2002 also benefited from the shutdown of package logistics’ former headquarters in Minneapolis, Minnesota inmid−2001.

Financial Segment

The following table summarizes significant items affecting comparability within the Financial segment:

2002 2001

Earnings (loss) before

Income Taxes

Thousands of dollarsAs reported $(31,544) $(32,200)

Included in earnings from operations:Restructuring and impairment charges $(10,499) $ (8,261)By−product revenues 1,313 1,398Insurance recovery related to 9/11 1,600 — Goodwill amortization — (1,323)

Total items affecting comparability $ (7,586) $ (8,186)

Net sales for our Financial segment decreased $66 million in 2002, or 13.4%, from a year ago, driven by the slowdown in the global capital markets, particularlyduring the second and third quarters of 2002. Net sales in 2002 from capital markets were down 19.3% between years, driven by lower net sales from domesticcapital markets of 18.4%. Net sales in 2002 from international capital markets, though a smaller percentage of total capital markets net sales, were down 24.3%between years. Net sales from customized communications solutions decreased 4.2% between years, driven by a decline in investor communications (e.g.,prospectuses, annual and semi−annual mutual funds statements) of 4.8%.

Value−added revenue for our Financial segment decreased $53 million in 2002, or 12.8%, from a year ago, driven by the net sales decline noted above, offsetslightly by a reduction in material costs during 2002 due to a shift to more composition and fulfillment work.

The loss from operations for our Financial segment in 2002 was $33 million, the same as in the prior year. The loss from operations in 2002 included $10 millionof restructuring and impairment charges, compared with $8 million of restructuring and impairment charges in 2001. 2002 also included a benefit of $2 millionfrom an insurance recovery related to September 11, as well as lower goodwill amortization expense between years of $1 million. The impact of restructuringsavings and cost reduction actions helped to mitigate the effect of lower sales volumes in 2002.

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Table of ContentsOther and Corporate Segments

The following table summarizes significant items affecting comparability within the Other and Corporate segments:

2002 2001

Earnings (loss) before

Income Taxes

Thousands of dollarsAs reported $(119,365) $(172,276)

Included in earnings from operations:Restructuring and impairment charges $ (21,436) $ (89,390)By−product revenues 4,514 4,719Goodwill amortization — (1,988)Provision for litigation (16,000) — LIFO benefit (provision) 4,800 (3,500)Pension and postretirement income (1) 19,907 36,034

(8,215) (54,125)

Included in other income (expense):Gain on sale of businesses and investments 6,350 6,641Other investment write−downs — (18,536)Affordable housing investment write−downs (26,000) (8,400)Goodwill amortization — (1,491)COLI−related expenses upon policy surrender (4,520) —

(24,170) (21,786)

Included in tax benefit (provision):Tax benefit 30,000 —

Total items affecting comparability $ (2,385) $ (75,911)

(1) Excludes service costs, which are recorded primarily in the Print, Logistics and Financial segments.

2002 net sales for Direct Mail were down 22.6% between years, due to lower prices, unfavorable work mix and more customer−furnished paper. 2002 net salesfor International were down $28 million between years due to declines in Latin America driven by lower volumes and the effects of foreign currency devaluation,partially offset by increases in Europe and China.

The decrease in value−added revenue in 2002 for both Direct Mail and International was attributable to the declines in net sales noted above.

The loss from operations for the Other segment was $27 million in 2002 compared with a loss of $135 million in 2001. Of the $108 million improvement inoperating results between years, $80 million related to lower restructuring and impairment charges and $16 million for lower spending on complementarybusinesses. Spending on complementary businesses in 2001 related primarily to Red Rover Digital, a provider of Internet web site design services, which wasshut down during the fourth quarter of 2001. Direct Mail’s loss from operations decreased between years due to lower restructuring and impairment charges,lower goodwill amortization, savings from previous restructuring actions and higher productivity that more than offset the impact of lower net sales.International’s loss from operations decreased in 2002 primarily due to lower restructuring and impairment charges and related cost savings in Latin America,partially offset by higher start−up costs for our facility in Shanghai, China ($6 million).

The loss from operations for the Corporate segment was $10 million in 2002 compared with earnings from operations of $51 million in 2001. The changebetween years of $61 million in the Corporate segment was due to

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Table of Contentsthe following: higher restructuring and impairment charges ($12 million); additional provision for litigation ($16 million); lower benefit plan earnings (excludingservice costs allocated to the segments) ($11 million); higher corporate staff expenses ($9 million); lower corporate expense allocations ($19 million) and highermiscellaneous expenses ($2 million), partially offset by a lower LIFO provision ($8 million).

For a reconciliation of earnings from operations to earnings before income taxes by segment, see Note 18, Industry Segment Information, to the consolidatedfinancial statements.

Restructuring and Impairment and Other Items

The following discussion should be read in conjunction with Note 4, “Restructuring and Impairment,” to the consolidated financial statements.

As part of our efforts to build a more effective print platform, we continually assess each plant’s scale of operations and geographic location relative to our entireprint platform. We also regularly assess our manufacturing platforms to assure that they are efficient, flexible and aligned properly with our customers’ needs.During 2003, we recorded pretax restructuring and impairment charges of $16 million ($13 million after−tax or $0.12 per diluted share). The 2003 pretax chargeincluded costs associated with newly−announced consolidations and workforce reductions, and costs associated with defined exit activities from previouslyannounced restructuring plans. Included were impairment charges of $7 million ($7 million after−tax or $0.06 per diluted share) related to the closure of adirectory plant in Chile ($3 million) and a write−down of goodwill within the Logistics segment ($4 million).

During 2002, we recorded pretax restructuring and impairment charges of $89 million ($54 million after−tax, or $0.47 per diluted share). The 2002 pretax chargeincluded $15 million related to the shutdown of our Berea, Ohio plant which produced short−run specialty magazines and was included within the Print segment.The total 2002 pretax charge was comprised of the following: employee termination benefits related to additional workforce reductions ($37 million); acurtailment loss related to postretirement benefit plans ($8 million); exit costs related to closed facilities ($6 million); relocation costs for defined exit activitieswhich were expensed as incurred ($22 million) and asset impairments to reduce the carrying values of assets held for disposal to fair value ($16 million).

During 2001, we recorded pretax restructuring and impairment charges of $196 million ($137 million after−tax, or $1.15 per diluted share). Of the total $196million pretax charge, $106 million related to various restructuring actions announced during 2001, and $90 million related to write−downs to adjust the carryingvalues of certain businesses to fair value. In 2001, we announced the closure of the following five U.S. manufacturing facilities: St. Petersburg and SouthDaytona, Florida; Des Moines, Iowa; Old Saybrook, Connecticut; and print production only at a Financial segment’s sales center in Houston, Texas. Each ofthese print facilities lacked the necessary scale and geographic location to remain competitive. All continuing customer work produced at these facilities wastransferred to other company facilities once necessary expansions to accommodate the new work were complete. The South Daytona, Florida, facility was sold inthe third quarter of 2003. In addition to the five U.S. manufacturing facilities, we closed two additional facilities in 2001 outside of the U.S. due to sales shortfallsfrom acquisition plans and to streamline costs: Ediciones Eclipse S.A. de C.V. (Eclipse) in Mexico and Hamburg Gráfica Editora (Hamburg) in Brazil. Eclipsewas sold in the fourth quarter of 2002 and Hamburg was sold in the second quarter of 2003.

During 2001, in accordance with SFAS No. 121, Accounting for the Impairment of Long−Lived Assets to Be Disposed Of, we recorded a pretax impairmentcharge of $90 million to adjust the carrying values of certain of our businesses to fair value. This included write−downs with respect to the Print segment (Berea,Ohio: $11 million) and the Other segment: Direct Mail (Newark, Ohio: $37 million), and International including Argentina (Atlántida Cochrane: $19 million);Brazil (Circulo do Livro and Hamburg Gráfica Editora: $11 million); and Mexico (Eclipse: $12 million). The pretax impairment charge of $90 million reducedgoodwill

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Table of Contentsby $36 million and property and equipment by $54 million. The write−downs were primarily the result of the deterioration in net sales from the originalacquisition plans, such that the carrying values of the entities were not considered to be recoverable.

In March 2001, we announced a $300 million upgrade of our print platform, approximately one−third of which related to restructuring costs and two−thirds ofwhich related to investment in new equipment. This upgrade program included the purchase of seven new presses and two associated binding lines, all of whichwere placed into service as of December 31, 2003. As of December 31, 2003, cumulative capital expenditures related to this upgrade program wereapproximately $220 million.

During 2003, we realized cost savings from restructuring actions of approximately $46 million, comprised of both incremental cost savings from 2002 on anannualized basis and from additional actions we took in 2003. We realized cost savings in 2003 of approximately $6 million from lower salary and employeebenefit−related expenses associated with workforce reductions during 2003. The impact on depreciation expense in 2003 following impairment charges of $3million for property, plant and equipment related to the closing of the Chile directory plant in the fourth quarter of 2003 was not material. We also realized, asexpected, approximately $40 million in incremental cost savings in 2003 from restructuring and impairment charges that we recorded during 2002. As the twolargest plant closures announced in 2001 (Old Saybrook, Connecticut, and Des Moines, Iowa, both included in our Print segment) did not cease operations untilthe second quarter of 2002, we realized additional benefits on an annualized basis in 2003 compared with 2002. Of the total $46 million in cost savings during2003, approximately $40 million related to lower salary and employee benefit−related expenses and $6 million related to lower depreciation expense. Theapproximate breakdown of these cost savings by segment was as follows: Print: $28 million; Financial: $16 million and Other: $2 million.

Based on the timing of restructuring and impairment charges recorded in 2003, we expect to recognize an additional $6 million in savings in 2004 consistingprimarily of lower salary expense and employee benefit−related expenses. The net book value of assets held for disposal at December 31, 2003 was $8 million.

The above reductions in our cost structure for 2003 were offset by the impact of price deterioration and a mix shift to work with a lower price per unit during theyear.

Financial Condition, Liquidity and Capital Resources

Because of our scale, manufacturing experience and strong customer base, we continue to generate strong cash flows from our printing businesses. We plan touse these cash flows to invest in future growth to create value for our shareholders. This includes upgrading our print platform to enable us to better serve ourcustomers in a more cost−effective, flexible and efficient manner. Further, it includes building value−added services upstream toward our customers anddownstream toward the consumer. If we do not have investment opportunities that generate returns above our cost of capital, our philosophy is to return excesscash to shareholders through share repurchase and/or dividends, while maintaining our targeted capital structure.

Commercial paper is our primary source of short−term financing. At December 31, 2003, we had $91 million outstanding in domestic commercial paperborrowings. In addition, at December 31, 2003, we had available two revolving credit facilities with a number of banks totaling $350 million. These facilitiesprovide support for issuing commercial paper and other credit needs. The facilities consist of a short−term facility that matures in October 2004 and provides forborrowings of up to $175 million and a long−term facility that matures in October 2007 and also provides for borrowings of up to $175 million. We pay anannual commitment fee on the total unused portion of the credit facilities of 0.07% for the short−term facility and 0.09% for the long−term facility. The facilitiesbear interest at variable rates based on the current LIBOR rate and the company’s credit rating. As of February 20, 2004, there have been no borrowings underthese credit facilities. Management believes that cash flow and borrowing capability are sufficient to fund operations and planned capital expenditures of thecompany for the forseeable future. See related discussion under Expected Impact of Combination with Moore Wallace Incorporated.

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Table of ContentsWe address certain financial exposures through a controlled program of risk management that includes the limited use of derivative financial instruments. Weenter into interest rate swaps to manage our interest costs and exposure to changes in interest rates. In addition, from time to time we enter into forward andoption contracts to minimize potential exchange risk and transaction losses from non−functional currency denominated borrowings, sales, purchases or expenses.We do not use derivatives for trading or speculative purposes and we are not a party to leveraged derivatives.

During 2001, we entered into interest rate swap agreements to exchange fixed rate for floating rate payments periodically over the life of certain outstanding debtinstruments. These swaps have been designated as fair value hedges and were highly effective as of December 31, 2003. During 2002 and 2003 we also enteredinto various interest rate swap agreements to exchange floating rate for fixed rate payments. See Note 11, Debt Financing and Interest Expense, to theconsolidated financial statements for details.

As of December 31, 2003, our only off−balance sheet financing activities were non−cancelable operating lease commitments described in Note 8, Commitmentsand Contingencies, to the consolidated financial statements.

Cash Flows From Operating Activities

Cash flow from operations in 2003 was $354 million, a decrease of $55 million from 2002. This decrease was primarily due to an increased investment inoperating working capital of $160 million in 2003, partially offset by lower cash payments between years of $119 million related to the COLI settlement (seeNote 10, Income Taxes, to the consolidated financial statements). Higher operating working capital in 2003 was driven by an increase of $134 million in accountsreceivable between years. Approximately two−thirds of this increase related to higher billings late in the fourth quarter of 2003, compared with a year ago, forour Print and Financial segments. This 2003 increase is expected to reverse in the first quarter of 2004. The remaining increase in accounts receivable in 2003was primarily due to growth of our International business in Europe and Asia, as well as our package logistics business within our Logistics segment.

Our cash conversion cycle (days’ sales outstanding plus days’ inventory on hand minus days’ payable outstanding) improved to 35 days compared with 40 days ayear ago, primarily due to an increase in days’ payable outstanding. The ratio of operating working capital to sales* increased slightly to 2.5% in 2003 from 2.2%in 2002, primarily as a result of higher average accounts receivable in 2003.

Cash flows from operations decreased by $139 million in 2002, primarily due to the payment of approximately $130 million related to the COLI settlement andlower net income excluding non−cash charges in 2002, partially offset by a 2001 tax payment of $62 million for COLI tax liabilities as a result of the settlementof a federal tax audit.

* The operating working capital to sales ratio is defined as a 13−month average of net receivables, net inventories and prepaid expenses minus accountspayable, accrued compensation and other accrued liabilities, divided by 12−month rolling net sales.

Cash Flows From Investing Activities

Our principal investing activities are capital expenditures to improve the productivity of operations. In 2003, capital expenditures totaled $203 million, a $39million decrease compared with 2002 spending of $242 million. 2003 spending primarily included investments to create a more efficient print platform to serveour magazine, catalog and retail customers. In addition, we acquired certain net assets of MLI, a Florida−based provider of package distribution services, forapproximately $17 million in cash. The reduction in capital spending in 2003 between years was primarily due to completion of the construction of the Shanghai,China plant in 2002 and completion of the print platform upgrade announced in 2001. We expect to continue to fund capital expenditures primarily through cashprovided by operations. Excluding the impact of our planned acquisition of Moore Wallace, we expect 2004 capital spending to be below $250 million.

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Table of ContentsAcquisitions

On November 8, 2003, we entered into a Combination Agreement (Agreement) with Moore Wallace, a leading provider of print management and outsourcedcommunications. Based on the terms of the Agreement, a direct, wholly−owned subsidiary of RR Donnelley will acquire each of the outstanding common sharesof Moore Wallace for 0.63 of a share of common stock of RR Donnelley. We expect that, upon closing of the transaction, we will issue approximately 100million shares of RR Donnelley common stock, as well as undertake Moore Wallace’s obligations of indebtedness, which were approximately $900 million as ofDecember 31, 2003. The transaction was approved by the Boards of Directors of both RR Donnelley and Moore Wallace, but remains subject to certain closingconditions that include, among others, the receipt of required approval from both companies’ shareholders and Ontario Superior Court of Justice approval of aplan of arrangement. The transaction is expected to close on February 27, 2004. See related discussion under Expected Impact of Combination with MooreWallace Incorporated.

On March 6, 2003, we acquired certain net assets of MLI, a Florida−based provider of package distribution services, for approximately $17 million in cash. MLIoperates sortation facilities and a dedicated fleet of vehicles to provide package distribution services. The purchase price has been allocated based on estimatedfair values at the date of acquisition and resulted in $16 million of goodwill. Subsequently, we recorded an impairment charge of $4 million for goodwill as aresult of the annual impairment review performed under SFAS No. 142, Goodwill and Other Intangible Assets.

We made no business acquisitions in 2002 or 2001.

Divestitures

In December 2003, we sold our cost basis investment in MultiMedia Live to an unrelated third−party purchaser for $2 million in cash. In connection with thistransaction, we recorded a pretax gain on sale of $2 million ($1 million after−tax, or $0.01 per diluted share).

In July 2003, we sold our 25% equity investment in Global Directory Services Company to an unrelated third−party purchaser for $23 million in cash. Inconnection with this transaction, we reduced goodwill by $10 million, which represented the remaining balance of the goodwill that arose at the time ofacquisition. We recorded a pretax gain on sale of $4 million ($3 million after−tax, or $0.03 per diluted share).

In June 2002, we recorded a pretax gain of $6 million ($6 million after−tax, or $0.06 per diluted share) upon collection of a note receivable that had beenpreviously reserved in connection with the sale of Modus Media International (MMI) in 1999.

In November 2001, we sold our remaining investment in the common stock of Stream for approximately $10 million in cash. We recognized a pretax gain of $7million ($7 million after−tax, or $0.05 per diluted share) from this transaction.

Cash Flows From Financing Activities

Financing activities include net borrowings, share repurchases and dividend payments. In 2003, our consolidated net debt repayments were $71 million comparedwith $64 million in 2002. The reduction in debt in 2003 included the repayment of a 7.0% note due January 1, 2003 for $110 million, partially offset by increasedcommercial paper borrowings. We reduced our debt levels in 2003 despite lower cash generated by operating activities principally through reduced capitalspending and lower share repurchase activity in 2003, following the discontinuance of the share repurchase program in January 2002.

Share Repurchases

We acquired 0.1 million, 0.5 million and 8.8 million shares of our stock in 2003, 2002 and 2001, respectively, for $2 million, $15 million and $248 million,respectively, in privately negotiated or open−market transactions.

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Table of ContentsIn January 2001, the Board of Directors authorized a share repurchase program for up to $300 million of the company’s common stock in privately negotiated oropen−market transactions. From February 1, 2001 through the expiration date (January 31, 2002), we purchased approximately 8.1 million shares at an aggregatecost of approximately $230 million under this program.

Net cash provided by (used for) repurchases of common stock, defined as cash used for share repurchases net of proceeds from stock options exercised, was $16million in 2003, ($3) million in 2002 and ($250) million in 2001.

A summary of the shares outstanding is presented below:

2003 2002 2001

In Thousands of SharesAs of December 31Basic 113,674 113,124 113,122Dilutive effect 1,963 453 2,069

Total 115,637 113,577 115,191

Full−Year AverageBasic 113,285 113,060 116,728Dilutive effect 1,017 1,312 1,770

Total 114,302 114,372 118,498

Dividends

Dividends to shareholders totaled $116 million, $111 million and $110 million in 2003, 2002 and 2001, respectively. In 2003, we increased our dividend by 4%,representing our 33rd consecutive annual dividend increase. We have consistently paid a dividend since becoming a public company in 1956.

Financial Condition

Our financial position remains strong as evidenced by our year−end balance sheet. Our total assets in 2003 were $3.1 billion compared with $3.2 billion at theend of 2002. Average invested capital (total debt and equity, computed on a 13−month average) was $1.9 billion at the end of both 2003 and 2002. The return onaverage invested capital increased to 11.0% in 2003 from 9.4% in 2002.

At December 31, 2003, the debt−to−capital ratio decreased to 49% from 52% in 2002 and year−end debt−to−total market value was 21% compared with 29% in2002. Market value was determined based on the number of basic shares outstanding multiplied by the per share closing price of our common stock as of therespective year−ends.

Contractual Cash Obligations and Other Commitments and Contingencies

The following table quantifies our future contractual obligations as of December 31, 2003:

Payments Due In

Total 2004 2005 2006 2007 2008 Thereafter

In ThousandsTotal debt* $ 920,440 $ 175,873 $ 166,892 $ 225,422 $ 858 $ 952 $ 350,443Operating leases 225,316 57,117 49,938 46,164 31,282 12,755 28,060Other 106,174 89,113 4,383 3,458 3,458 3,458 2,304

Total $ 1,251,930 $ 322,103 $ 221,213 $ 275,044 $35,598 $17,165 $ 380,807

* Excludes $8 million related to the fair market value of interest rate swaps as of December 31, 2003 related to debt due in 2006.

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Table of ContentsOther represents contractual obligations for the purchase of property, plant and equipment ($81 million in total) and various outsourced professional services($25 million in total).

We maintain credit facilities in the U.S. and in our international locations that provide support for issuing commercial paper and for meeting the financing needsof our non−U.S. operating units. We maintain revolving credit facilities with a group of U.S. and foreign banks that provide for borrowings of up to $350 million,of which $175 million expires in October 2004, and $175 million expires in October 2007. As of December 31, 2003, we had no borrowings under these creditfacilities. See related discussion under Financial Condition, Liquidity and Capital Resources and Expected Impact of Combination with Moore WallaceIncorporated.

As of December 31, 2003, our non−U.S. operating units had approximately $205 million in available credit facilities, most of which are uncommitted. Therewere approximately $74 million in borrowings against these facilities at December 31, 2003, which are included in short−term debt on F−3, as appropriate.

Other Information

Employees

As of December 31, 2003, we had approximately 30,000 employees. Approximately 80% of our employees work in the U.S., and approximately 2% of those arecovered by collective bargaining agreements. Of the approximately 6,000 people working in our international operations, 33% are covered by collectivebargaining agreements as is customary in those locations.

Environmental, Health and Safety

Our business is subject to various laws and regulations governing employee health and safety and environmental protection. Our policy is to comply with all lawsand regulations, and our objective is to create an injury−free workplace. We strive to achieve the highest performance standards of environmental performanceand employee health and safety within both the printing industry and the manufacturing community.

We do not anticipate that compliance with laws and regulations in these areas will have a material adverse effect on our competitive or consolidated financialposition.

Litigation and Contingent Liabilities

For a discussion of certain litigation involving the company, see Note 8, Commitments and Contingencies, to the consolidated financial statements.

New Accounting Pronouncements

In December 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 132 (revised 2003), Employers’ Disclosures about Pensions and OtherPostretirement Benefits, an amendment of FASB Statements No. 87, 88 and 106, and a revision of FASB Statement No. 132. This standard revises employers’disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by FASBStatements No. 87, Employers’ Accounting for Pensions, No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans andfor Termination Benefits, and No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions. The new rules require additional disclosuresabout the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. The requiredinformation should be provided separately for pension plans and for other postretirement benefit plans. The new disclosures are generally effective for 2003calendar year−end financial statements of public companies, with a delayed effective date for certain disclosures and for foreign plans. See Note 9, RetirementPlans, to the consolidated financial statements for the related disclosures as required under this statement. Adoption of this statement had no material impact onthe company’s financial position, results of operations or cash flows.

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Table of ContentsEffective January 1, 2003, the company adopted SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which rescinds EmergingIssues Task Force (EITF) Issue No. 94−3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (includingCertain Costs Incurred in a Restructuring). SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they areincurred, rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by this statement include lease termination costs andcertain employee severance costs that are associated with a restructuring, discontinued operation, plant closing or other exit or disposal activity. Adoption of thisstatement had no material impact on the company’s financial position, results of operations or cash flows.

As of January 1, 2003, the company adopted the disclosure requirement of SFAS No. 148, Accounting for Stock−Based Compensation—Transition andDisclosure. This statement amends SFAS No. 123, Accounting for Stock−Based Compensation, to provide alternative methods of transition for a voluntarychange to the fair value based−method of accounting for stock−based employee compensation. In addition, this statement amends the disclosure requirements ofSFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock−based employeecompensation and the effect of the method used on reported results. As of December 31, 2003, the company has elected not to change to the fair value−basedmethod of accounting for stock−based employee compensation. The company continues to account for employee stock options under APB No. 25, Accountingfor Stock Issued to Employees, under which the company did not recognize any compensation expense for 2003, 2002 or 2001. See Note 15, Stock and IncentivePrograms for Employees, to the consolidated financial statements for the related disclosures required under SFAS No. 148.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 was issued inorder to address some of the implementation issues about interpreting and applying the definition of a derivative, in particular, interpreting the meaning of (1) thephrase an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changesin market factors and (2) the term underlying, as well as issues about how to discern the characteristics of a derivative that contains a financing component;incorporate some of the conclusions reached as part of the Derivatives Implementation Group (DIG) process that ultimately made it necessary to amend SFASNo. 133; and align SFAS No. 133 with the decisions that the FASB has reached in other FASB projects dealing with financial instruments. This statement iseffective for contracts entered into or modified after June 30, 2003, and is effective for hedging relationships designated after June 30, 2003, except for certaintransition and effective dates relating to other amendments that principally resulted from the DIG process. Adoption of this standard had no impact on thecompany’s financial position, results of operations or cash flows.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, which requirescertain financial instruments that were previously presented on the consolidated balance sheets as equity to be presented as liabilities. Such instruments includemandatorily redeemable financial instruments and certain options and warrants. SFAS No. 150 is effective for financial instruments entered into or modified afterMay 31, 2003, and otherwise was effective for the company as of July 1, 2003. Adoption of this standard had no impact on the company’s financial position,results of operations or cash flows.

Effective July 1, 2003, the company adopted Emerging Issues Task Force (EITF) Issue No. 00−21, Accounting For Revenue Arrangements with MultipleDeliverables, which establishes criteria for whether revenue on a deliverable can be recognized separately from other deliverables in a multiple deliverablearrangement. The criteria considers whether the delivered item has stand−alone value to the customer, whether the fair value of the delivered item can be reliablydetermined and the customer’s right of return for the delivered item. Adoption of this standard had no material impact on the company’s financial position,results of operations or cash flows.

In May 2003, the FASB issued EITF Issue No. 01−8, Determining Whether an Arrangement Contains a Lease, which requires capital lease treatment forarrangements containing an embedded lease, thereby conveying

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Table of Contentsthe right to control the use of property, plant or equipment (collectively, “property”) whether the right to control the use of the property is explicitly or implicitlyspecified. The right is conveyed if the purchaser (lessee) obtains physical or operational control of the underlying property or takes substantially all of its output.This pronouncement applies prospectively to new or modified arrangements beginning after May 28, 2003. Adoption of this standard had no impact on thecompany’s financial position, results of operations or cash flows.

In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others (FIN 45). The Interpretation elaborates on the existing disclosure requirements for most guarantees, including loanguarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for thefair value, or market value, of the obligations it assumes under the guarantee and must disclose that information in its interim and annual financial statements.The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. Adoption of thisstandard had no material impact on the company’s financial position, results of operations or cash flows.

In January 2003 and December 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), and its revision, FIN 46−R,respectively. FIN 46 and FIN 46−R address the consolidation of entities whose equity holders have either not provided sufficient equity at risk to allow the entityto finance its own activities or do not possess certain characteristics of a controlling financial interest. FIN 46 and FIN 46−R require the consolidation of theseentities, known as variable interest entities (VIEs), by the primary beneficiary of the entity. The primary beneficiary is the entity, if any, that is subject to amajority of the risk of loss from the VIE’s activities, entitled to receive a majority of the VIE’s residual returns, or both. FIN 46 and FIN 46−R are applicable forfinancial statements of public entities that have interests in VIEs or potential VIEs referred to as special−purpose entities for periods ending after December 15,2003. Application by public entities for all other types of entities is required in financial statements for periods ending after March 15, 2004. The company’sinvestment in affordable housing and other investments fall into this latter category. The company’s risk of loss related to its equity investments, includinginvestments in affordable housing entities, is generally limited to the carrying value of these investments, which was approximately $105 million at December31, 2003. The company is continuing to evaluate its investments to determine which, if any, will be impacted by the adoption of FIN 46 and FIN 46−R. Adoptionof both of these standards is not expected to have a material impact on the company’s financial position, results of operations or cash flows.

On December 17, 2003, the Staff of the Securities and Exchange Commission (SEC or the Staff) issued Staff Accounting Bulletin No. 104 (SAB 104), RevenueRecognition, which amends SAB 101, Revenue Recognition in Financial Statements. SAB 104’s primary purpose is to rescind accounting guidance contained inSAB 101 related to multiple element revenue arrangements, superseded as a result of the issuance of EITF 00−21. Additionally, SAB 104 rescinds the SEC’sRevenue Recognition in Financial Statements Frequently Asked Questions and Answers (the FAQ) issued with SAB 101 that had been codified in SEC Topic 13,Revenue Recognition. Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 has changed to reflect the issuance ofEITF 00−21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. Adoption of this standard had no materialimpact on the company’s financial position, results of operations or cash flows.

On December 8, 2003, President Bush signed into law a bill that expands Medicare, primarily adding a prescription drug benefit for Medicare−eligible retireesstarting in 2006. Under this bill, postretirement plans with prescription drug benefits that are at least “actuarially equivalent” to the Medicare Part D benefit willbe eligible for a 28% subsidy. In response to this bill, on January 12, 2004, the FASB issued FASB Staff Position (FSP) 106−1, Accounting and DisclosureRequirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. FSP 106−1 addresses how to incorporate this subsidyinto the calculation of the accumulated periodic benefit obligation (APBO) and net periodic postretirement benefit costs, and also allows

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Table of Contentsplan sponsors to defer recognizing the effects of the bill in the accounting for its postretirement plan under SFAS No. 106, Employers’ Accounting forPostretirement Benefits Other Than Pensions, until further authoritative guidance on the accounting for the federal subsidy is issued. As the measurement datefor the company’s postretirement benefit plan is September 30, 2003, the APBO and the net periodic postretirement benefit cost in the financial statements andaccompanying notes do not reflect the effects of the bill on the plan. In addition, specific authoritative guidance on the accounting for the federal subsidy ispending, and when issued, could require a change to previously reported information. The company has deferred adoption of this standard, as is allowed underFSP 106−1, until further guidance is issued.

Expected Impact of Combination with Moore Wallace Incorporated

We expect to complete our planned Combination with Moore Wallace on February 27, 2004 (see Note 3, Acquisitions and Investments, to the consolidatedfinancial statements for a further description of the pending transaction). Upon closing the transaction, a direct, wholly−owned subsidiary of RR Donnelley willacquire each of the outstanding shares of Moore Wallace for 0.63 of a share of common stock of RR Donnelley. We expect that, upon closing of the transaction,we will issue approximately 100 million shares of RR Donnelley common stock, as well as undertake Moore Wallace’s obligations of indebtedness, which wereapproximately $900 million at December 31, 2003. The Combination is expected to create the world’s premier full−service commercial printer with over $8billion in annual net sales and approximately 50,000 employees worldwide.

The strategy for the combined company will focus on improved returns, lower costs and increased profitability; increased financial strength; and enhancedrevenue opportunities. While detailed plans have not yet been finalized, we believe that the Combination will impact operating results in future periods throughimproved cross−selling efforts by providing a “total management solution”; leveraging product and distribution strengths; aggressive cost reduction efforts,including headcount and facility rationalization; and increased purchasing power with suppliers to reduce costs and increase efficiencies. We cannot predict theeffect these actions will have on our results of operations or financial condition.

We will account for the Combination with Moore Wallace under the purchase method of accounting for business combinations under accounting principlesgenerally accepted in the U.S. Our reported financial condition and results of operations issued after the completion of the transaction will reflect MooreWallace’s balances and results of operations after completion of the transaction, but will not be restated retroactively to reflect the historical financial position orresults of operations of Moore Wallace.

The transaction is expected to be immediately accretive to earnings in the first full year of operations, excluding the impact of transaction−related charges. Inaddition to enhanced revenue opportunities, the combined company expects to generate cost savings of at least $100 million on an annualized basis in the first 12–to 24 months after the closing. These savings are anticipated to result from the elimination of duplicative administrative and infrastructure costs, reduction inprocurement expenses and asset rationalization. The combined company is also expected to generate substantial cash flow in the first year of consolidatedoperations. The combined company expects to maintain an annual dividend, which is currently $1.04 per share.

In connection with the Combination, we intend to enter into a new five−year, unsecured revolving credit facility of between $850 million and $1 billion. Weintend to use this facility for general corporate purposes, including support for issuing commercial paper and letters of credit. This new facility is intended toreplace our existing 364−day and five−year credit facilities, which mature in October 2004 and October 2007, respectively, as well as to replace a credit facilitycurrently maintained by Moore Wallace.

Simultaneously with or immediately following closing of the Combination, we expect to issue commercial paper, supported by the new revolving credit facilityof approximately $500 million to $550 million. We intend to use the proceeds of this issuance to retire a portion of Moore Wallace’s existing debt, pay feesrequired to terminate certain Moore Wallace interest rate swaps, pay fees and expenses related to the Combination and related financings, and provide funds forother general corporate purposes.

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Table of ContentsSubsequent to the closing of the Combination, we expect to issue additional long−term debt, the proceeds of which we may use to retire a portion of MooreWallace’s existing debt, repay outstanding commercial paper, pay debt repayment or swap termination costs and fees, or provide funds for other generalcorporate purposes. On February 11, 2004, we entered into two separate treasury rate−lock transactions totaling $400 million with two financial institutions inorder to effectively lock in a portion of the interest rate on a portion of the expected debt issue. If we do not complete the debt issue as expected before therate−lock transactions expire or are terminated, we may incur significant costs or expenses if interest rates on treasury securities at the time of expiry ortermination are less than the contracted transaction rate.

While we expect to complete the Combination as currently planned, it is subject to closing conditions. If any of the closing conditions are not met or if theCombination does not close as we currently expect, we may be required to pay additional transaction−related and financing costs and fees. Under certain termsspecified in the Combination Agreement, we may also be required to pay termination fees and transaction expenses to Moore Wallace of up to $85 million. AtDecember 31, 2003, we had capitalized $3 million of costs related to the Combination that would be charged to expense if the Combination were not completed.

Outlook

The environment is highly competitive in most of our product categories and geographic regions. Competition is based largely on price, quality and servicing thespecial needs of customers. Industry analysts believe that there is overcapacity in most commercial printing markets exacerbated by recent drops in marketdemand. Therefore, competition is intense. Our intent is to differentiate our service offerings so that we are viewed by our customers as a partner that can helpthem deliver effective and targeted communications in the right format to the right audience at the right time.

We are a large user of paper, supplied to us by our customers or bought by us. The cost and supply of certain paper grades used in the manufacturing process willcontinue to affect our financial results. However, management currently does not foresee any disruptive conditions affecting prices or supply of paper in 2004.

Postal costs are a significant component of our customers’ cost structures and postal rate changes can influence the number of pieces that our customers arewilling to mail. Any resulting decline in print volumes mailed could have an effect on our financial results. Postal rates increased in January 2001, July 2001 andJuly 2002, and the company does not expect postal rate increases to occur until 2006. Postal rate increases can enhance the value of our Logistics segment to ourcustomers, as we are able to improve the cost efficiency of mail processing and distribution. This ability to deliver mail on a more precise schedule and at a lowerrelative cost should enhance our position in the marketplace.

The cost of energy affects our operating costs in our Print segment and transportation costs in our Logistics segment. In our Logistics segment, increases in fuelcosts can be offset by fuel surcharges passed on to customers, but continuing increases in these and other energy costs could affect our consolidated financialresults.

Consumer confidence and economic growth are key drivers of demand for our services. The slowdown experienced in the U.S. and international economies iscontinuing to affect demand across most of our businesses. Uncertainty in the economy has led customers across most of our end markets to indicate that theyanticipate flat demand throughout 2004.

In the longer term, technological changes, including the electronic distribution of documents and data and the on−line distribution and hosting of media content,present both risks and opportunities for us. Many of our businesses leverage distinctive capabilities to participate in the rapid growth in electroniccommunications. Our goal remains to help our customers succeed by delivering effective and targeted communications in the right format to the right audiencesat the right time. We believe that with our competitive strengths, including our comprehensive service offerings, technology leadership, depth of managementexperience, customer relationships and economies of scale, we can develop the most valuable solutions for our customers, which should result in increasedshareholder value.

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Table of Contents ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The company is exposed to market risk from changes in interest rates and foreign currency exchange rates. As such, the company monitors the interest rateenvironment and modifies the components of its debt portfolio as necessary to manage funding costs and interest rate risks. Generally, the company maintains atleast half of its debt at fixed rates (approximately 58.7% and 52.6% at December 31, 2003 and 2002, respectively). Excluded from the calculation of fixed−ratedebt at both December 31, 2003 and 2002 is $200 million in fixed−rate debt that was swapped to floating rates to take advantage of lower interest rates onfloating−rate debt. The swap was executed in two transactions that mature in November 2006. To reduce its exposure to future increases in floating interest rates,the company entered into additional floating−to−fixed rate swap agreements, effectively fixing the interest rates for the May 15, 2003 and November 17, 2003interest rate resets on the original swaps (see Note 14, Financial Instruments, to the consolidated financial statements). The company’s exposure to adversechanges in foreign exchange rates is immaterial to the consolidated financial statements of the company. The company occasionally uses other financialinstruments to hedge exposures to interest rate and foreign exchange rate changes. The company uses derivative financial instruments as a risk management tooland not for trading or speculative purposes. For further discussion relating to financial instruments, see Note 14, Financial Instruments, to the consolidatedfinancial statements.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial information required by Item 8 is contained in Item 15 of Part IV.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A CONTROLS AND PROCEDURES

The company has carried out an evaluation under the supervision of management, including the Chairman, President and Chief Executive Officer and theExecutive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the company’s disclosure controls and procedures.Based on that evaluation, the company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2003, the company’sdisclosure controls and procedures were effective to ensure that information required to be disclosed by the company in the reports filed or submitted by it underthe Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of theSEC, and include controls and procedures designed to ensure that information required to be disclosed by the company in such reports is accumulated andcommunicated to the company’s management, including the Chairman, President and Chief Executive Officer and the Executive Vice President and ChiefFinancial Officer, as appropriate to allow timely decisions regarding required disclosures.

In the fourth quarter of 2003, there has been no change in the company’s internal control over financial reporting that has materially affected, or is reasonablylikely to affect, the company’s internal control over financial reporting. However, management, in consultation with Deloitte & Touche LLP (Deloitte), thecompany’s independent accountants, has identified and reported to the audit committee of the company’s board of directors certain matters involving internalcontrol deficiencies at the company’s Logistics segment that Deloitte considers to be a reportable condition under standards established by the American Instituteof Certified Public Accountants. The identified internal control deficiencies affect the timeliness and accuracy of recording certain transactions in the packagebusiness of the company’s Logistics segment. The disparate operating and financial information systems supporting the package business of Logistics haveinherent limitations resulting in a control environment heavily reliant upon manual processes and procedures that are detective in nature, as opposed to controlsin business processes and systems that would be more preventive in nature. As a result, as Logistics has grown and entered into more complex customer andcarrier arrangements and transactions, existing internal controls were not adequate to detect errors in the capturing, processing and reporting of certaintransactions on a timely basis.

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Table of ContentsThe matters involving the reportable condition have been discussed in detail among management, the audit committee of our board of directors and Deloitte.While Logistics’ management is taking steps to reduce the complexity of the package business, management has assigned the highest priority to the correction ofthese internal control deficiencies giving rise to the reportable condition, and management is committed to addressing and resolving them fully. Management hasinvestigated the internal control deficiencies, and is in varying degrees of planning and implementing their remediation. These improvements, which consist ofchanges in the design and operation of various internal control procedures, are expected to be completed during 2004.

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Table of Contents PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF R.R. DONNELLEY & SONS COMPANY

See the list of the company’s executive officers and related information under “Executive Officers of R.R. Donnelley & Sons Company” at the end of Part I ofthis annual report.

BOARD OF DIRECTORS OF RR DONNELLEY

NameBusiness Experience, Other Business Directorships Held, Age as of January 15, 2004,

Period Served as a Director of RR Donnelley

Joseph B. Anderson, Jr.(1) Chairman and chief executive officer, Vibration Control Technologies, LLC, a manufacturer of engine crankshaftdampers, 2002−present; chairman and chief executive officer, Chivas Industries L.L.C., a manufacturer of interiorlighting and trim, injection molding and energy absorbing foam components for the automotive industry,1994−2002Directorships: Chivas Industries L.L.C.; ArvinMeritor, Inc.; Quaker Chemical Corporation; M.D.L. CapitalCorporationCommittees: Audit; Corporate Responsibility & GovernanceAge: 60Director since: 1998Term to Expire: 2005

Gregory Q. Brown Executive vice president of Motorola, Inc., a provider of integrated communications and embedded electronicsolutions, and president and chief executive officer of Commercial, Government and Industrial Solutions Sector ofMotorola, Inc., 2003−present; chairman and chief executive officer of Micromuse Inc., a provider of networkdiagnostics and service−assurance software, 1999−2002; president of Ameritech Custom Business Services,Ameritech Corporation, a communications services provider, 1996−1999Directorships: Micromuse Inc.Committees: Audit; Corporate Responsibility & GovernanceAge: 43Director since: 2001Term to Expire: 2006

Martha Layne Collins(1) Executive scholar in residence, Georgetown College, 1998−present; Director of International business andmanagement, University of Kentucky, 1996−1998;President, Martha Layne Collins & Associates, a consulting firm, 1988−presentDirectorships: Eastman Kodak Company; Bank of LouisvilleCommittees: Audit; Corporate Responsibility & GovernanceAge: 67Director since: 1987Term to Expire: 2004

William L. Davis(1) Chairman, president and chief executive officer of the company, 2001−present; Chairman and chief executiveofficer of the company, 1997−2001; Senior executive vice president, Emerson Electric Company, manufacturer ofelectrical, electronic and related products, 1993−1997Directorships: Marathon Oil CorporationCommittees: NoneAge: 60Director since: 1997Term to Expire: 2004

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Table of Contents

NameBusiness Experience, Other Business Directorships Held, Age as of January 15, 2004, Period

Served as a Director of RR Donnelley

James R. Donnelley Partner, Stet & Query Limited Partnership, a private investment partnership, 2000−present; vice chairman of theRR Donnelley board of directors, 1990−2000 (retired)Directorships: PMP Limited (in which RR Donnelley has a $6 million investment comprised of common sharesacquired on the open market); Sierra Pacific Resources Corp.Committees: FinanceAge: 68Director since: 1976Term to Expire: 2006

Judith H. Hamilton Former president and chief executive officer of Classroom Connect Inc., a provider of materials integrating theInternet into the education process, 1999−2002; former president and chief executive officer of FirstFloorSoftware, an Internet software publisher, 1996−1998Directorships: Artistic Media Partners, Inc.; Ex’pression Center for New Media Committees: Audit; CorporateResponsibility & GovernanceAge: 59Director since: 1995Term to Expire: 2005

Thomas S. Johnson Chairman and chief executive officer of GreenPoint Financial Corp., a bank holding company, and its subsidiary,GreenPoint Bank, a New York chartered savings bank, 1993−presentDirectorships: GreenPoint Financial Corp.; GreenPoint Bank; Alleghany Corporation; The Phoenix Companies,Inc.Committees: Finance; Human ResourcesAge: 63Director since: 1990Term to Expire: 2006

Oliver R. Sockwell President and chief executive officer of Construction Loan Insurance Corporation (Connie Lee) and its subsidiary,Connie Lee Insurance Company, financial guarantee insurance companies, 1987−1997 (retired)Directorships: Liz Claiborne, Inc.Committees: Corporate Responsibility & Governance; Human ResourcesAge: 60Director since: 1997Term to Expire: 2004

Bide L. Thomas President of Commonwealth Edison Company, a producer, distributor and seller of electric energy, 1987−1992(retired)Committees: Audit; FinanceAge: 68Director since: 1987Term to Expire : 2005

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Table of Contents

NameBusiness Experience, Other Business Directorships Held, Age as of January 15, 2004, Period

Served as a Director of RR Donnelley

Norman H. Wesley Chairman and chief executive officer of Fortune Brands, Inc., a manufacturer of consumer products,1999−present; president and chief operating officer of Fortune Brands, Inc., 1999; chairman and chief executiveofficer of Fortune Brands, Inc. subsidiaries MasterBrand Industries, Inc., a hardware and home improvementcompany, and ACCO World Corporation, an office product company, 1997−1998; president and chief executiveofficer of ACCO World Corporation, 1990−1997Directorships: Fortune Brands, Inc.; Pactiv CorporationCommittees: Finance; Human ResourcesAge: 54Director since: 2001Term to Expire: 2006

Stephen M. Wolf Managing partner of Alpilles, LLC, a private investment company, 2003−present; non−executive chairman of USAirways Group, Inc., an air carrier holding company, and its subsidiary US Airways, Inc., an air carrier, 2003;chairman of US Airways Group, Inc.* and US Airways, Inc., 1996−2002; chief executive officer of US AirwaysGroup, Inc. and US Airways, Inc., 1996−1998, 2001−2002Directorships: Altria Group, Inc.Committees: Finance; Human ResourcesAge: 62Director since: 1995Term to Expire: 2004* U.S. Airways Group, Inc. filed for voluntary reorganization under Chapter 11 of the U.S. Bankruptcy Code onAugust 11, 2002 and emerged from bankruptcy protection under a plan of reorganization effective March 31,2003.

(1) Messrs. Anderson and Davis, and Ms. Collins will resign from the Board of Directors upon the completion of the combination with Moore Wallace.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

Section 16(a) of the Securities Exchange Act of 1934 requires the company’s officers and directors, and persons who own more than ten percent of the commonstock of the company, to file with the SEC and the New York Stock Exchange reports of ownership of company securities and changes in reported ownership.Officers, directors and greater than ten percent shareholders are required by SEC rules to furnish the company with copies of all Section 16(a) reports they file.

Based solely on review of the copies of such forms furnished to the company, or written representations from the reporting persons that no Form 5 was required,the company believes that during 2003 all Section 16(a) filing requirements applicable to its officers, directors, and greater than ten percent beneficial ownerswere complied with; except that (i) one report on Form 4 relating to the receipt of a dividend paid on the directors’ phantom stock which was paid in additionalshares of phantom stock was filed late for each non−management director, (ii) one report on Form 4 relating to the rescission of shares erroneously granted inlieu of fees was filed late for Mr. Brown and Mr. Thomas, and (iii) one report on Form 4 relating to the acquisition of shares was filed late for Mr. Wesley.

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Table of ContentsCode of Ethics

The company has adopted the Principles of Ethical Business Conduct which, together with the policies referred to therein, are applicable to all directors andemployees of the company. In addition, the company has adopted a policy statement entitled Code of Ethics that applies to our chief executive officer and oursenior financial officers. The Principles of Ethical Business Conduct and the Code of Ethics cover all areas of professional conduct, including conflicts ofinterest, disclosure obligations, insider trading and confidential information, as well as compliance with all laws, rules and regulations applicable to our business.The company encourages all employees, officers and directors to promptly report any violations of any of the company’s policies. In the event that anamendment to, or a waiver from, a provision of the Principles of Ethical Business Conduct or Code of Ethics that applies to any of our directors or executiveofficers is necessary, the company intends to post such information on its web site. A copy of our Code of Ethics has been filed as Exhibit 14 to this Report onForm 10−K.

Audit Committee

The company has a separately−designated standing audit committee. Each member of the audit committee is independent according to the definition ofindependence provided by the New York Stock Exchange rules and the federal securities laws. The members of the audit committee are identified in the list ofdirectors above. The company’s board of directors has determined that Bide L. Thomas, the chair of the audit committee, is an “audit committee financial expert”as such term is defined under the federal securities laws.

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Table of Contents ITEM 11. EXECUTIVE COMPENSATION

Executive Compensation

The summary compensation table summarizes the compensation of the RR Donnelley’s chief executive officer and the other persons required to be disclosed forup to three calendar years in which they served as executive officers.

Summary Compensation Table

ANNUAL COMPENSATION LONG−TERM COMPENSATION

Name and PrincipalPosition Year Salary ($) Bonus ($) Other ($)

RestrictedStock

Awards ($) Options

LTIP

Payouts ($)

All Other

Compensation ($)

William L. DavisChairman, President and ChiefExecutive Officer

200320022001

$900,000900,000900,000

$ 37,877—

63,180

$114,468114,017114,331

(2)(2)(2)

$ — —

3,380,781(3)

393,750236,000210,000

$3,450,704— —

$ 53,361442,654442,204

(5)

Michael B. Allen(1)Former Executive VicePresident, Print

200320022001

343,750340,000321,250

7,916—

29,801

— — —

188,000— —

(4) 30,000— —

(4) 663,091— —

9,05498,62595,247

(5)

John C. CampanelliPresident, Print 2003 381,246 8,048 — — 62,000 479,650 6,551(5)

Monica M. FohrmanSenior Vice President, GeneralCounsel and Secretary

200320022001

314,750294,999265,000

8,194—

12,588

— — —

188,000— —

43,000— —

663,091— —

3,00023,48223,032

(5)

Joseph C. LawlerExecutive Vice President

200320022001

411,250392,500370,000

3,545157,52323,058

— — —

— 1,088,500

—

43,000— —

663,091— —

16,52085,89585,545

(5)

Robert S. Pyzdrowski(1)President−Solutions Delivery,Print

20032002

338,875322,374

7,23853,729

— —

319,600—

31,000—

479,650—

6,67766,178

(5)

Gregory A. StoklosaExecutive Vice President andChief Financial Officer

200320022001

380,000350,000350,000

9,783—

17,652

— — —

282,000— —

60,000— —

900,174— —

9,93762,99862,549

(5)

(1) Was not serving as an executive officer at December 31, 2003.(2) Includes $40,684, $39,299 and $49,869 for use of the company−owned airplane and automobiles in 2003, 2002 and 2001, respectively.(3) Reflects stock units granted pursuant to Mr. Davis’ 2001 employment agreement.(4) In connection with the termination of Mr. Allen’s employment, 10,000 of the shares of restricted common stock granted to Mr. Allen in 2003 and the

30,000 options granted to Mr. Allen in 2003 were cancelled as of December 31, 2003.(5) Includes premiums paid by the company in connection with whole life and disability insurance policies owned by the named executive officers in the

following amounts: Mr. Davis, $50,361; Mr. Allen, $6,579; Mr. Campanelli, $3,551; Mr. Lawler, $13,520; Mr. Pyzdrowski, $3,677; and Mr. Stoklosa,$7,347. Also includes an RR Donnelley contribution to each named executive officer’s retirement savings plan account as follows: Mr. Davis $3,000; Mr.Allen $2,475; Mr. Campanelli $3,000; Ms. Fohrman $3,000; Mr. Lawler $3,000; Mr. Pyzdrowski $3,000; and Mr. Stoklosa $2,590.

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Table of ContentsAs of December 31, 2003, the named executives’ holdings of shares of RR Donnelley restricted common stock were valued as follows:

Restricted Common Stock

Name

Shares of Restricted

Common Stock Value ($)

William L. Davis 188,101(1) $ 5,646,792Michael B. Allen — (2) — John C. Campanelli 22,300 669,446Monica M. Fohrman 10,000 300,200Joseph C. Lawler 35,000 1,050,700Robert S. Pyzdrowski 25,700 771,514Gregory A. Stoklosa 15,000 450,300

(1) Includes 115,385 stock units awarded pursuant to Mr. Davis’ 2001 employment agreement and an additional 9,781 stock units added to his account aspayment of dividends pursuant to the terms of his 2001 employment agreement.

(2) In connection with the termination of Mr. Allen’s employment, 17,800 shares of his RR Donnelley restricted common stock, having a value of $534,356,were cancelled as of December 31, 2003.

Both the shares of restricted common stock and the stock units pay dividends at the same rate and time as RR Donnelley common stock. Dividends payable onstock units are converted into additional stock units. Restricted stock granted prior to 2000 generally vests on the fifth anniversary of the date it was granted,although restricted stock granted prior to 2000 held by Mr. Davis vests as provided in his 1997 employment agreement. Restricted stock granted since 2000generally vests in equal proportions over three years. Stock units vest and are payable as provided in Mr. Davis’ 2001 employment agreement.

The following table details options to purchase common stock that were granted in 2003 to the individuals named in the summary compensation table:

Option Grants in 2003

Name

Number ofSecurities

UnderlyingOptions

Granted(1)

% of TotalOptions

Granted toEmployees in

2003

Exercise Price

($/share)

Expiration

Date

Grant DatePresent Value

($)(2)

William L. Davis 393,750 12.06 $ 18.8000 3/25/2013 $ 2,331,000Michael B. Allen 30,000(3) 0.92 18.8000 3/25/2013 177,600John C. Campanelli 34,000 1.04 18.8000 3/25/2013 201,280

28,000 0.86 26.7000 7/6/2013 161,560Monica M. Fohrman 43,000 1.32 18.8000 3/25/2013 254,560Joseph C. Lawler 43,000 1.32 18.8000 3/25/2013 254,560Robert S. Pyzdrowski 31,000 0.95 18.8000 3/25/2013 183,520Gregory A. Stoklosa 60,000 1.84 18.8000 3/25/2013 355,200

(1) Options become exercisable over a four−year period starting on the grant date, at the rate of 20% a year, with the final 40% exercisable at the end of thefourth year. This schedule may be accelerated upon death, disability or a change in control.

(2) Grant date present value reflects a reduced value attributable to potential forfeiture due to vesting requirements or shortened exercise period followingemployment termination.

(3) In connection with the termination of Mr. Allen’s employment, the 30,000 options granted to Mr. Allen in 2003 were cancelled as of December 31, 2003.

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Table of ContentsRR Donnelley uses the Black−Scholes option pricing method to calculate the value of stock options as of the date of grant. The accuracy of this model dependson key assumptions about future interest rates, stock price volatility and dividend yields, among other factors. The grant date present value of these options wascalculated using the figures below:

Estimated Grant Date Present Value of Options

Name Grant Date Date of Exercise

Volatility

Factor Yield

AnnualDividend

Rate

Risk−FreeRate of

Return

Options expiring March 25, 2013 March 26, 2003 March 25, 2013 28.53% 5.32% $ 1.00 3.96%Options expiring July 6, 2013 July 7, 2003 July 6, 2013 27.82% 3.75% $ 1.00 3.74%

The following table reflects options exercised in 2003 and the value of options at December 31, 2003 held by the individuals named in the summarycompensation table.

Options Exercised During 2003 and Year−End Option Values

Number of SecuritiesUnderlying

Unexercised Options at

December 31, 2003

Value of Unexercised In−the−Money Options at

December 31, 2003(2)

Name

Number of Shares

Acquired on Exercise Value Realized(1)

Exercisable /

Unexercisable Exercisable / Unexercisable

William L. Davis — $ — 1,257,200 / 797,750 $1,511,948 / $5,802,098Michael B. Allen 25,800 544,220 87,800 / 81,600 22,155 / — (3)John C. Campanelli — — 127,500 / 99,200 509,972 / 806,495Monica M. Fohrman — — 129,100 / 94,600 698,485 / 943,053Joseph C. Lawler — — 169,400 / 106,600 690,892 / 943,055Robert S. Pyzdrowski — — 156,800 / 68,200 521,031 / 332,057Gregory A. Stoklosa — — 158,600 / 132,000 832,694 / 550,065

(1) Value realized is determined by subtracting the exercise price from the fair market value on the date of exercise. Fair market value is the average of thehigh and the low prices reported in the New York Stock Exchange Composite Transactions report.

(2) Value of unexercised options is determined by subtracting the exercise price from the fair market value on December 31, 2003. Fair market value is theaverage of the high and low prices reported in the New York Stock Exchange Composite Transactions report.

(3) In connection with the termination of Mr. Allen’s employment, all of his options that were not exercisable were cancelled as of December 31, 2003.

The following table reflects the long−term incentive awards, designated in units of RR Donnelley stock, granted to Mr. Davis and the other individuals named inthe summary compensation table in 2003:

Long−Term Incentive Awards in 2003

Number of

Units

Performance or OtherPeriod until Maturation

or Payout

Estimated Future Payouts under Non−StockPrice−Based Plans

Name Threshold (Units)(1) Target (Units) Maximum (Units)

William L. Davis 75,540 3 years 75,540 151,080 302,160Michael B. Allen(2) 13,678 3 years 13,678 27,356 54,712John C. Campanelli 19,649 3 years 19,649 39,298 78,596Monica M. Fohrman 13,221 3 years 13,221 26,442 52,884Joseph C. Lawler 13,221 3 years 13,221 26,442 52,884Robert S. Pyzdrowski 9,649 3 years 9,649 19,298 38,596Gregory A. Stoklosa 17,746 3 years 17,746 35,492 70,984

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(1) Long−term incentive award units are based on the company’s performance as measured by relative total shareholder returns (RTSR) over a three−yearperiod. RTSR objectives measure the company’s stock price appreciation plus dividend yield for the forty−day trading period immediately prior to thebeginning of the period covered by the award against the last forty−day trading period during the three−year period, relative to the performance of the S&P500 for those same measurement times. Threshold amounts will be paid provided that RR Donnelley’s RTSR at the end of the performance period equalsthe 50th percentile of the S&P 500.

(2) In connection with the termination of Mr. Allen’s employment, the entire long−term incentive award made to Mr. Allen in 2003 has been cancelled.

Unless otherwise determined by the company’s human resources committee, upon death, disability or retirement, the company will distribute an amount equal tothe LTIP award which would have been earned during the performance period in which the death, disability or retirement occurred, pro rated through the date ofdeath, disability or retirement. The award will be forfeited in the event of any termination of employment other than due to death, disability or retirement. In theevent of a change in control, the highest level of achievement will be deemed to be met and the award will be fully and immediately vested.

Retirement Benefits

Under RR Donnelley’s Retirement Benefit Plan and Unfunded Supplemental Benefit Plan (collectively, the Retirement Plans), each year employees accrueretirement benefits equal to 1.5% of compensation up to the social security wage base average for the preceding 35−year period, plus 2% of remainingcompensation. Compensation covered by the Retirement Plans generally includes salary and annual cash bonus awards.

The U.S. government places limitations on pensions that can be paid under federal income tax qualified plans. Pension amounts that exceed such limitations aswell as benefits accrued under the executive arrangement discussed in the section entitled “Executive Agreements” are paid under the Unfunded SupplementalBenefit Plan.

New participants in the Retirement Plans will participate in a cash balance plan. Under the traditional plan, benefits are paid monthly after retirement for the lifeof the participant or, if the participant is married or chooses an optional benefit form, in an actuarially reduced amount for the life of the participant and survivingspouse or other named survivor. Under the cash balance plan, a participant may elect to receive a lump sum amount.

Except as otherwise noted, the following table shows estimates of the annual benefits payable to the individuals named in the summary compensation table uponretirement at age 65. These estimates include the annual benefits computed on service through December 31, 2003 and additional annual benefits they may earnin the future, assuming they continue in RR Donnelley’s employ to age 65 at current base pay plus incentives.

Retirement Benefits

NameBenefits Accrued

through December 31, 2003 ($)

Estimated BenefitsJanuary 1, 2004

through Age 65 ($)

Estimated

Total Benefits ($)

William L. Davis $ 1,161,838 $ 34,286 $ 1,196,124(1)Michael B. Allen 103,023 — 103,023(2)John C. Campanelli 97,275 224,325 321,600Monica M. Fohrman 97,736 101,806 199,592Joseph C. Lawler 83,716 142,410 226,126Robert S. Pyzdrowski 136,045 151,626 287,671Gregory A. Stoklosa 59,165 192,535 251,700

(1) Mr. Davis’ pension benefits are governed by his 2001 employment agreement discussed in the section entitled “Executive Agreements.”

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(2) Mr. Allen terminated his employment with RR Donnelley on December 31, 2003. Under the terms of RR Donnelley’s Retirement Benefit Plan, the actualbenefits Mr. Allen will receive depend upon the date on which he elects to begin to receive benefits. However, no additional benefits accrue to Mr. Allenafter December 31, 2003.

Director Compensation

Directors who are not officers of the company receive the following annual cash fees for their services to the RR Donnelley board of directors:

• $32,000 base cash retainer for serving as a director;

• $1,000 for each committee of which they are a member;

• an additional $4,500 for each committee chairmanship they hold;

• $1,000 for each board or committee meeting they attend; and

• $1,000 for each non−meeting day the company requests them to spend on committee work.

Non−employee directors may elect to have some or all of their cash fees applied toward the purchase of shares of RR Donnelley common stock at fair marketvalue, issued in the form of 10−year options to purchase shares of RR Donnelley common stock at an exercise price equal to the fair market value of the shares ofRR Donnelley common stock on the date granted or deferred. Any deferred amounts will, at the director’s election, either earn the same rate of interest asfive−year U.S. government bonds or be converted into shares of phantom stock. A director may receive deferred fees, along with the interest or gains earned, in alump sum or in as many as 10 equal annual installments. In either case, payments are made after the director reaches age 65 or leaves the board, whichever comeslater.

In addition to the annual cash fees, non−employee directors receive an annual award of phantom stock. The phantom stock is credited as of January 2 each year,with the number of shares determined by dividing 65% of the director’s annual retainer by the fair market value of a share of RR Donnelley common stock on thedate of award. Each non−employee director may elect to receive options in lieu of all or part of such phantom stock award.

The 2000 Stock Incentive Plan provides for grants of stock options to each non−employee director every year immediately after the RR Donnelley annualmeeting of shareholders to purchase a number of shares of RR Donnelley common stock equal to 2.5 times the director’s base cash retainer divided by the fairmarket value of a share of RR Donnelley common stock on the date of grant. The exercise price is the fair market value of a share of RR Donnelley commonstock on the date granted. The options may be exercised beginning one year after the date granted or the day immediately preceding the next annual meeting ofstockholders (whichever is sooner) and ending 10 years after the date granted.

If stockholders approve a new performance incentive plan at a special meeting of stockholders to be held on February 23, 2004, in lieu of the automatic grant ofstock options contained in the 2000 Stock Incentive Plan, on the dates of each RR Donnelley annual meeting of stockholders beginning in 2004, the board ofdirectors will make an equity award to each non−employee director. The award may be in the form of stock options, restricted stock, stock units or stockappreciations rights, provided that the dollar value to a director of any award may not exceed three times the then current annual base cash retainer fee payable tonon−employee directors. In determining the dollar value of an award, the board will use the fair market value of a share of RR Donnelley common stock on thedate of grant.

Upon the completion of the Moore Wallace transaction (see Expected Impact of Combination with Moore Wallace Incorporated under Item 7, Management’sDiscussion and Analysis of Financial Condition and Results of Operations), two non−employee directors will resign from the board of directors. They willcontinue to receive the base cash retainer paid to continuing directors for a period of one year.

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Table of ContentsTo emphasize the importance of stock ownership by company directors, the board of directors has established stock ownership guidelines that require directors toacquire and hold over time shares of RR Donnelley common stock having a market value of five times the annual base cash retainer paid a director.

Under the retirement plan for directors, which plan does not apply to directors first elected on or after January 1, 2000, each of the current directors who wasactive as of January 1, 1997 elected either:

• to receive a credit for the present value of such director’s earned annual retirement benefit as of December 31, 1996 (based on a deferred compensationagreement); or

• to convert the present value of such director’s earned annual retirement benefit into shares of phantom stock.

In addition, non−employee directors serving on the board of directors between January 1, 1997 and January 1, 2000 who had less than 10 years of service on theboard received an annual award of phantom stock. The phantom stock was credited as of January 1 each year, with the number of shares of RR Donnelleycommon stock determined by dividing 35% of the director’s annual base cash retainer by the fair market value of a share of RR Donnelley common stock on thedate of award. Each non−employee director could elect to receive options in lieu of all or part of such phantom stock award.

As of January 2, 2000, the company ceased to have a retirement program for directors, although benefits previously accrued continue to be paid.

Severance Pay

The company has adopted a severance pay program consisting of severance agreements between the company and the executive officers named in the summarycompensation table, certain other officers and key employees.

Under the severance agreements, an executive is entitled to specified payments and benefits if, after a change in control, the executive is terminated for reasonsother than cause or if the executive leaves the company after a change in control because of any of the following conditions:

• a decrease in responsibilities or compensation,

• a job relocation that requires a change in residence or

• a significant increase in travel.

These agreements do not apply to executives who are terminated for cause, retire, become disabled or die.

Severance benefits generally include:

• a lump−sum payment of three times current salary and bonus,

• cash payment in lieu of outstanding stock bonus awards under RR Donnelley’s stock−based plans,

• cash payment equal to the value of outstanding stock options,

• cash payment equal to three years’ additional accrued benefits under RR Donnelley’s Retirement Benefit Plan and

• life, disability, accident and health insurance benefits for 24 months after termination.

If any of this compensation is subject to the federal excise tax on “excess parachute payments,” the company has also agreed to pay an additional amount tocover these taxes.

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Table of ContentsExecutive Agreements

The Davis Agreement. On March 18, 1997, William L. Davis joined the company as chief executive officer and entered into an employment agreement with thecompany with an initial term ending on March 31, 2002. On November 30, 2001, the company and Mr. Davis entered into a new employment agreement,replacing the 1997 agreement. The initial term of the 2001 agreement ends on March 31, 2004. Beginning April 1, 2003, the initial term automatically extendsdaily by one additional day unless the provision for extension is terminated by the company or Mr. Davis. In March 2003, the company gave such a terminationnotice.

Under the 2001 agreement, Mr. Davis receives a base annual salary of not less than $900,000 and participates in annual and long−term performance incentiveplans adopted by the human resources committee of the board of directors.

In the 2001 agreement, Mr. Davis was awarded 115,385 stock units vesting in three installments in March 2002 through March 2004, payable in common stockof RR Donnelley following Mr. Davis’ retirement, death or permanent and total disability. Unvested stock units are forfeited upon termination of Mr. Davis’employment for any other reason. The 2001 agreement also required RR Donnelley to make a long−term performance award of 14,480 stock units to Mr. Davisin January 2002, which award was paid as part of the LTIP payout described in the summary compensation table.

The 2001 agreement requires the company to grant annually to Mr. Davis a non−qualified stock option to purchase shares of common stock of RR Donnelleydetermined as a percentage of his base salary. In 2002, the grant was for 236,000 shares of common stock, vesting over a four−year period. In 2003, the grantwas for that number of shares of RR Donnelley common stock having a value equal to 2.625 times Mr. Davis’ base salary on the date of the grant, or 393,750shares, vesting over a four year period. Further, the 2001 agreement requires the company to provide Mr. Davis with yearly retirement payments upon hisreaching the age of 65, which together with payments received through social security benefits, benefits payable from retirement plans of his former employersand the benefits otherwise payable under RR Donnelley’s Retirement Benefit Plan and Unfunded Supplemental Benefit Plan, equal $1,228,000 or 50% of his“final average compensation” (as defined in the 2001 agreement), whichever is greater. These payments are subject to reduction if Mr. Davis’ employmentterminates prior to March 31, 2004.

If Mr. Davis dies before the employment term expires, his estate will receive a termination bonus in addition to all equity awards described above. Thetermination bonus will equal his previous year’s bonus, prorated for the portion of the year worked prior to his death. If he becomes disabled, the company orMr. Davis may terminate the 2001 agreement. In addition to the equity awards and termination bonus described above, Mr. Davis would receive 60% of his lastbase salary plus full benefit and pension accrual until he reaches age 65. Mr. Davis will be entitled to certain benefits if his employment is terminated by thecompany without “cause” or by him for “good reason” (as each term is defined in the 2001 agreement), including:

• a lump sum severance payment of 250% of his base salary and target annual bonus (300% if termination results from a change in control),

• the termination bonus and

• continued benefit coverage and pension accrual for 30 months.

If Mr. Davis is terminated by the company without cause, if Mr. Davis terminates his employment for good reason or if there is a “change in control” of RRDonnelley (as defined in the 2001 agreement), all stock options, restricted stock awards and long−term incentive awards not yet vested will become fully vested.

Mr. Davis has agreed to specified limitations on his ability to compete with, or solicit employees from, the company for two years after the termination of the2001 agreement.

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Table of ContentsMr. Davis continues to hold awards originally made under the terms of the 1997 agreement. Under the terms of a restricted stock award granted pursuant to thatagreement, Mr. Davis vested in a restricted stock grant during 2001 and will vest in a restricted stock grant of 62,935 shares on October 1, 2004. He also receivedoptions to purchase 500,000 shares of RR Donnelley common stock at $45.1875 (150% of the price of RR Donnelley common stock upon his start ofemployment) vesting on or after March 18, 2000 if the fair market value of RR Donnelley common stock exceeds that price for 10 consecutive trading days(which occurred in June and July, 1998) and 500,000 shares at $30.125, which fully vested as of March 2001.

The Allen Agreement. In connection with the termination of his employment, Michael B. Allen was entitled to receive the standard payments and benefitsprovided to officers who are workforce reduced from the company. In addition, the company agreed to reimburse Mr. Allen for up to $20,000 in legal feesincurred by him in consulting an attorney surrounding the terms and conditions of his termination of employment.

The Lawler Agreement. In connection with the hiring of Joseph C. Lawler in October 1995, the company granted Mr. Lawler an advance in the amount of$200,000 against his anticipated payout under a long−term incentive program in which he participated. Because the company failed to meet the threshold for anypayout under the program, the company agreed to convert the advance to Mr. Lawler into an interest−bearing loan due February 15, 2001. During 2001, thecompany agreed to extend the repayment date of the loan until March 1, 2004. Interest on the original loan amount accrues at the five−year Treasury bill rate, andbeginning on January 1, 2002, interest is payable annually until the loan is repaid.

Board Compensation Committee Report on Executive Compensation

Information addressing this item will be contained in the company’s definitive Proxy Statement to be prepared and circulated in connection with its AnnualMeeting of Stockholders, currently planned to be mailed by mid−March, 2004.

Performance Graph

Information addressing this item will be contained in the company’s definitive Proxy Statement to be prepared and circulated in connection with its AnnualMeeting of Stockholders, currently planned to be mailed by mid−March, 2004.

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Table of Contents

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table shows, as of January 15, 2004, except where otherwise noted, the ownership of shares of RR Donnelley common stock, RR Donnelleyrestricted stock and RR Donnelley options exercisable prior to March 15, 2004, of each person who is known to the company to own beneficially more than 5%of the company’s outstanding common stock, of each director, of each named executive officer and by all directors and executive officers as a group. The addressof each beneficial owner who is also a director or executive officer of the company is c/o R.R. Donnelley & Sons Company, 77 West Wacker Drive, Chicago,Illinois 60601.

Name and Address of Beneficial Owner

Number of Sharesof Common

Stock(1)

Number ofShares ofRestricted

Stock(2)

Stock OptionsExercisable

Prior toMarch 15, 2004 Total Shares

Percentageof Total

Outstanding

Dodge & CoxOne Sansome Street35th FloorSan Francisco, California 94104

14,801,043(3) — — 14,801,043 12.97%

William L. Davis, Chairman,President, Chief Executive Officerand Director 214,576 62,935(7) 1,257,200 1,534,711 1.34%

Michael B. Allen, Former Executive Vice President,Print 693 — 87,100 87,793 *

John C. Campanelli, President,Print 7,085 22,300 12,000 41,385 *

Monica M. Fohrman, Senior Vice President, GeneralCounsel and Secretary 28,158 10,000 127,100 165,258 *

Joseph C. Lawler, Executive Vice President 22,035 35,000 181,400 238,435 *

Robert S. Pyzdrowski, President,Solutions Delivery, Print 14,938(4) 25,700 147,400 188,038 *

Gregory A. Stoklosa, ExecutiveVice President and Chief Financial Officer 10,412 15,000 158,600 184,012 *

Joseph B. Anderson, Jr., Director 400 — 13,532 13,932 *

Gregory Q. Brown, Director 1,037 — 2,591 3,628 *

Martha Layne Collins, Director 6,193 — 29,739 35,932 *

James R. Donnelley, Director 2,973,932(5) — 59,191 3,033,123 2.66%

Judith H. Hamilton, Director 9,139 — 25,532 34,671 *

Thomas S. Johnson, Director 8,564 — 44,615 53,179 *

Oliver R. Sockwell, Director 3,000 — 17,532 20,532 *

Bide L. Thomas, Director 6,779 — 29,739 36,518 *

Norman H. Wesley, Director 3,000(6) — 2,591 5,591 *

Stephen M. Wolf, Director 30,000 — 29,532 59,532 *

All directors and executive officers as a group 3,339,941 170,935 2,225,394 5,736,270 5.03%

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Table of Contents

* Ownership represents less than 1% of the outstanding shares of common stock.(1) Includes interests in shares held through the RR Donnelley Stock Fund; does not reflect deferred fees for which directors have elected to receive RR

Donnelley phantom stock.(2) Subject to limits on sale or transfer and may be forfeited under certain conditions.(3) The number of shares of RR Donnelley common stock beneficially owned is based on a Form 13G report filed on February 17, 2004, by Dodge & Cox

reflecting ownership as of December 31, 2003. According to the Form 13G, Dodge & Cox has sole investment authority over all shares of RR Donnelleycommon stock, sole voting authority over 13,752,597 shares of RR Donnelley common stock, shared voting authority over 154,600 shares of RRDonnelley common stock and no voting authority over 893,846 shares of RR Donnelley common stock.

(4) Does not include 3,925 shares of RR Donnelley common stock owned by a family member of Mr. Pyzdrowski as to which shares Mr. Pyzdrowskidisclaims beneficial ownership.

(5) Includes 2,122,688 shares of RR Donnelley common stock for which Mr. Donnelley shares voting and investment authority; does not include 58,695shares of RR Donnelley common stock owned by a family member of Mr. Donnelley as to which shares Mr. Donnelley disclaims beneficial ownership.

(6) Does not include 375 shares of RR Donnelley common stock owned by a family trust as to which shares Mr. Wesley disclaims beneficial ownership.(7) Does not include 125,166 RR Donnelley stock units held by Mr. Davis, 60% of which are vested. (See the discussion of Mr. Davis’ 2001 employment

agreement.

Equity Compensation Plan Information

Information as of December 31, 2003 concerning compensation plans under which RR Donnelley’s equity securities are authorized for issuance is as follows (inthousands, except per share data):

Equity Compensation Plan Information

Plan Category

Number of Securitiesto Be Issued upon

Exercise ofOutstanding Options,

Warrants and Rights

Weighted−AverageExercise Price of

Outstanding Options,Warrants and

Rights

Number of SecuritiesRemaining Availablefor Future Issuance

under EquityCompensation Plans(Excluding Securities

Reflected in

Column (a))

(a) (b) (c)Equity compensation plans approved by security holders(1) 12,164,070 $ 28.04 7,155,956Equity compensation plans not approved by securityholders(2) 6,211,738 27.86 979,843

Total 18,375,808 27.98 8,135,799

(1) Represents shareholder approved stock incentive plan shares.(2) Represents the Donnelley Shares Program and the 2000 Broad−Based Incentive Plan.

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Table of Contents2000 Broad−Based Stock Incentive Plan

In 2000, the board of directors approved the adoption of the 2000 Broad−Based Stock Incentive Plan (2000 Broad−Based Plan) to provide incentives to keyemployees of the company and its subsidiaries. Awards under the 2000 Broad−Based Plan are generally not restricted to any specific form or structure and mayinclude, without limitation, stock options, stock units, restricted stock awards, cash or stock bonuses and stock appreciation rights.

Awards may be conditioned on continued employment, have various vesting schedules and accelerated vesting and exercisability provisions in the event of,among other things, a “change in control” (as defined in the 2000 Broad−Based Plan). The 2000 Broad−Based Plan is administered by the human resourcescommittee of the board of directors, which may delegate its responsibilities to the chief executive officer or another executive officer.

Originally, 2,000,000 shares of RR Donnelley common stock were reserved and authorized for issuance under the 2000 Broad−Based Plan. An additional3,000,000 shares (for an aggregate of 5,000,000 shares) were subsequently reserved and authorized for issuance under the 2000 Broad−Based Plan. Sharessubject to a grant or award under the 2000 Broad−Based Plan which are not issued or delivered by reason of the expiration, termination, cancellation or forfeitureof all or a portion of the grant or award, by reason of withholding of shares to pay all or a portion of the exercise price or to satisfy tax withholding obligations orby reason of the delivery of shares prior to June 30, 2003 to pay all or a portion of the exercise price or to satisfy tax withholding obligations are again availablefor future grants and awards. However, stock options and SARs granted in tandem with or by reference to a stock option granted prior to the grant of such SARsare treated as one grant. To the extent that the company repurchased shares in the open market or otherwise prior to June 30, 2003, a number of shares having arepurchase price equal to the aggregate proceeds received by the company from the exercise of stock options granted by the company under the 2000Broad−Based Plan are again available for future grants and awards. As of December 31, 2003, options to purchase 6,978,337 shares of common stock wereoutstanding. These options have a purchase price equal to the fair market value of a share of common stock at the time of the grant. All of the outstanding optionsgenerally vest over a period of three years, are not exercisable unless vested (subject in some cases to early vesting and exercisability upon specified events,including the death or permanent disability of the optionee, termination of the optionee’s employment under specified circumstances or a change in control) andgenerally expire 10 years after the date of grant. No awards other than options have been made under the 2000 Broad−Based Plan.

RR Donnelley Shares Stock Option Plan

In 1994, the board of directors approved the adoption of the Donnelley Shares Stock Option Plan (RR Donnelley Shares Plan). All employees (other thanofficers) were eligible to receive options under the plan. The RR Donnelley Shares Plan was administered by the human resources committee of the board ofdirectors, which had full authority to grant options under the plan and to determine the terms and conditions of all options granted under the plan. The companylast granted options under the RR Donnelley Shares Plan in 1996, and the plan expired in 1999.

There were 6,000,000 shares of common stock reserved and authorized for issuance under the RR Donnelley Shares Plan. As of December 31, 2003, options topurchase 3,819,988 shares of common stock were outstanding under the RR Donnelley Shares Plan. The purchase price for options granted under the RRDonnelley Shares Plan was the fair market value of a share of RR Donnelley common stock at the time of the grant. All of the outstanding options generallyvested over a period of three years, are not exercisable unless vested (subject in some cases to early vesting and exercisability in certain events, including thedeath or permanent disability of the optionee, termination of the optionee’s employment under certain circumstances or a “change in control” (as defined in theRR Donnelley Shares Plan)) and generally expire 10 years after the date of grant.

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Table of Contents

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Audit Fees.

Deloitte & Touche LLP (Deloitte) was the company’s principal accountant for the years ended December 31, 2003 and 2002. Total fees paid to Deloitte for auditservices rendered during 2003 and 2002 were $1,469,855 and $1,249,371, respectively.

Arthur Andersen LLP (Andersen) was the company’s principal accountant prior to May 15, 2002. Total fees paid to Andersen for audit services rendered during2003 and 2002 were $0 and $80,000, respectively.

Total fees incurred by the company for audit services rendered by Deloitte and Andersen during 2003 and 2002 were $1,469,855 and $1,329,371, respectively.

Audit−Related Fees.

Total fees paid to Deloitte for audit−related services rendered during 2003 and 2002 were $885,358 and $140,806, respectively, related primarily to due diligencefor potential acquisitions and accounting consultation.

Total fees paid to Andersen for audit−related services rendered during 2003 and 2002 were $0 and $105,353, respectively, related primarily to accountingconsultation and agreed−upon procedures.

Total fees incurred by the company for audit−related services rendered by Deloitte and Andersen during 2003 and 2002 were $885,358 and $246,159,respectively.

Tax Fees.

Total fees paid to Deloitte for tax services rendered during 2003 and 2002 were $269,858 and $548,686, respectively, related primarily to international anddomestic tax consultation, expatriate services and other consulting services.

Total fees paid to Andersen for tax services rendered during 2003 and 2002 were $0 and $461,601, respectively, related primarily to international taxconsultation, expatriate services and other consulting services.

Total fees incurred by the company for tax services rendered by Deloitte and Andersen during 2003 and 2002 were $269,858 and $1,010,287, respectively.

All Other Fees.

Total fees paid to Deloitte for all other services rendered during 2003 and 2002 were $349,026 and $306,912, respectively, primarily related to business reviewof controls surrounding systems implementation, and other professional services.

Total fees paid to Andersen for all other services rendered during 2003 and 2002 were $0 and $187,000, respectively, primarily related to the outsourcing ofservices and other professional services.

Total fees incurred by the company for all other services rendered by Deloitte and Andersen during 2003 and 2002 were $349,026 and $493,912, respectively.

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Table of ContentsAudit Committee Pre−Approval Policy

Under policies and procedures adopted by the audit committee of the company’s board of directors, the company’s principal accountant may not be engaged toprovide non−audit services that are prohibited by law or regulation to be provided by it, nor may the company’s principal accountant be engaged to provide anyother non−audit service unless it is determined that the engagement of the principal accountant provides a business benefit resulting from its inherent knowledgeof the company while not impairing its independence. The audit committee or its chairman must pre−approve the engagement of the company’s principalaccountant to provide both audit and permissible non−audit services. If the chairman pre−approves any engagement, he is to make a report to the full auditcommittee at its next meeting. 100% of all services provided by the company’s principal accountant in 2003 were pre−approved by the audit committee or itschairman.

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Table of Contents PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8−K

(a) 1. Financial Statements

The financial statements listed in the accompanying index (page F−1) to the financial statements are filed as part of this annual report.2. Financial Statement Schedule

The financial statement schedule listed in the accompanying index (page F−1) to the financial statements is filed as part of this annual report.3. Exhibits

The exhibits listed on the accompanying index to exhibits (pages E−1 through E−2) are filed as part of this annual report.

(b) Reports on Form 8−K

A current report on Form 8−K was filed on November 5, 2003 and included Item 7, “Financial Statements and Exhibits” and Item 12, “Results ofOperations and Financial Condition” and a current report on Form 8−K was filed on November 10, 2003 and included Item 5, “Other Events andRequired FD Disclosure,” Item 7, “Financial Statements and Exhibits” and Item 9, “Regulation FD Disclosure.”

(c) Exhibits

The exhibits listed on the accompanying index (pages E−1 through E−2) are filed as part of this annual report.

(d) Financial Statements omitted

Certain schedules have been omitted because the required information is included in the consolidated financial statements or notes thereto or becausethey are not applicable or not required.

63

Table of Contents SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized, on the 23rd day of February, 2004.

R.R. DONNELLEY & SONS COMPANY

By: /S/ VIRGINIA L. SEGGERMAN

Virginia L. SeggermanVice President and Controller

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant and in the capacities indicated, on the 23rd day of February, 2004.

Signature and Title

/S/ WILLIAM L. DAVIS

William L. DavisChairman of the Board, President and

Chief Executive Officer, Director(Principal Executive Officer)

/S/ GREGORY A. STOKLOSA

Gregory A. StoklosaExecutive Vice President and

Chief Financial Officer(Principal Financial Officer)

/S/ VIRGINIA L. SEGGERMAN

Virginia L. SeggermanVice President and Controller(Principal Accounting Officer)

/S/ JOSEPH B. ANDERSON, JR*

Joseph B. Anderson, Jr.Director

/S/ GREGORY Q. BROWN*

Gregory Q. BrownDirector

/S/ MARTHA LAYNE COLLINS

Martha Layne CollinsDirector

Signature and Title

/S/ JAMES R. DONNELLEY*

James R. DonnelleyDirector

Judith H. HamiltonDirector

/S/ THOMAS S. JOHNSON*

Thomas S. JohnsonDirector

/S/ OLIVER R. SOCKWELL*

Oliver R. SockwellDirector

/S/ BIDE L. THOMAS*

Bide L. ThomasDirector

/S/ NORMAN H. WESLEY*

Norman H. WesleyDirector

/S/ STEPHEN M. WOLF*

Stephen M. WolfDirector

By: /S/ MONICA M. FOHRMAN

Monica M. FohrmanAs Attorney−in−Fact

* By Monica M. Fohrman as Attorney−in−Fact pursuant to Powers of Attorney executed by the directors listed above, which Powers of Attorney have beenfiled with the Securities and Exchange Commission.

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Table of Contents ITEM 15(a). INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

Page

Consolidated Statements of Income for each of the three years ended December 31, 2003 F−2Consolidated Balance Sheets at December 31, 2003 and 2002 F−3Consolidated Statements of Cash Flows for each of the three years ended December 31, 2003 F−4Consolidated Statements of Shareholders’ Equity for each of the three years ended December 31, 2003 F−5Notes to Consolidated Financial Statements F−6Reports of Independent Auditors F−37Unaudited Interim Financial Information, Dividend Summary and Financial Summary F−39Reports of Independent Auditors on Financial Statement Schedule F−41Financial Statement Schedule II—Valuation and Qualifying Accounts F−42

F−1

Table of ContentsR.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

In Thousands, Except Per−Share Data

Year Ended December 31

2003 2002 2001

Net sales $4,787,162 $4,754,937 $5,297,760Cost of sales 3,951,476 3,887,368 4,387,309

Gross profit 835,686 867,569 910,451Selling and administrative expenses 548,466 533,703 567,635Restructuring and impairment charges 16,427 88,929 195,545

Earnings from operations 270,793 244,937 147,271

Interest expense, net (50,359) (62,818) (71,183)Other income (expense):Gain on sale of businesses and investments 5,526 6,350 6,641Investment write−downs — — (18,536)Other, net (17,683) (12,736) 10,701

(12,157) (6,386) (1,194)

Earnings before income taxes 208,277 175,733 74,894Income taxes 31,768 33,496 49,906

Net income $ 176,509 $ 142,237 $ 24,988

Net income per share of common stockBasic $ 1.56 $ 1.26 $ 0.21Diluted 1.54 1.24 0.21

Weighted average number of common shares outstandingBasic 113,285 113,060 116,728Diluted 114,302 114,372 118,498

See accompanying Notes to Consolidated Financial Statements.

F−2

Table of ContentsR.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

Thousands of Dollars, Except Share Data

December 31

2003 2002

AssetsCash and equivalents $ 60,837 $ 60,543Receivables, less allowances for doubtful accounts of $26,316 in 2003 and $19,250 in 2002 738,516 601,184Inventories 120,374 116,191Prepaid expenses and other current assets 79,783 88,521

Total current assets 999,510 866,439

Net property, plant and equipment, at cost, less accumulated depreciation of $3,520,441 in 2003 and $3,432,171 in 20021,334,574 1,411,016Goodwill 317,472 308,174Other intangible assets, net of accumulated amortization of $271,940 in 2003 and $259,477 in 2002 81,702 96,662Prepaid pension cost 314,366 335,455Other noncurrent assets 141,326 164,217

Total assets $3,188,950 $3,181,963

LiabilitiesAccounts payable $ 303,959 $ 267,690Accrued compensation 143,412 157,070Short−term debt 175,873 245,782Current and deferred income taxes 10,179 1,397Other accrued liabilities 250,159 282,791

Total current liabilities 883,582 954,730

Long−term debt 752,497 752,870Deferred income taxes 234,046 214,112Other noncurrent liabilities 335,673 345,657

Total noncurrent liabilities 1,322,216 1,312,639

Shareholders’ EquityCommon stock at stated value ($1.25 par value) Authorized shares: 500,000,000; Issued: 140,889,050 at December 31,2003 and 2002 308,462 308,462Retained earnings 1,641,706 1,593,107Accumulated other comprehensive loss (123,684) (115,456)Unearned compensation (2,937) (5,177)Reacquired common stock, at cost, 27,214,677 shares and 27,764,983 shares at December 31, 2003 and 2002, respectively(840,395) (866,342)

Total shareholders’ equity 983,152 914,594

Total liabilities and shareholders’ equity $3,188,950 $3,181,963

See accompanying Notes to Consolidated Financial Statements.

F−3

Table of ContentsR.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Thousands of Dollars

Year Ended December 31

2003 2002 2001

Cash flows from operating activities:Net income $ 176,509 $ 142,237 $ 24,988Restructuring and impairment charges 16,427 88,929 195,545Reversal of tax reserves (39,903) (30,000) — (Gain) loss on sale or write−down of businesses and investments (4,158) (6,350) 11,895Depreciation 276,005 288,499 315,937Amortization 53,354 63,873 62,786Gain on sale of assets (4,012) (13,824) (8,204)Net change in operating working capital (159,801) 17,288 59,681Net change in other assets and liabilities 54,730 (148,842) (122,549)Other (14,966) 7,109 8,315

Net cash provided by operating activities 354,185 408,919 548,394

Cash flows from investing activities:Capital expenditures (202,916) (241,597) (273,340)Other investments including acquisitions, net of cash acquired (16,910) — (2,416)Disposition of assets 34,847 25,471 19,346

Net cash used for investing activities (184,979) (216,126) (256,410)

Cash flows from financing activities:Repayments of long−term debt (111,176) (78,726) (4,741)Long−term borrowings — — 225,000Net proceeds from (repayments of) short−term borrowings 39,905 14,591 (163,274)Disposition of reacquired common stock 18,468 16,603 23,520Acquisition of common stock (2,455) (20,029) (273,255)Cash dividends paid (115,736) (110,964) (109,987)

Net cash used for financing activities (170,994) (178,525) (302,737)

Effect of exchange rate changes on cash flows 2,082 (2,340) (1,505)

Net increase (decrease) in cash and equivalents 294 11,928 (12,258)

Cash and equivalents at beginning of year 60,543 48,615 60,873

Cash and equivalents at end of year $ 60,837 $ 60,543 $ 48,615

Changes in operating working capital, net of acquisitions and divestitures:

2003 2002 2001

Decrease (increase) in assets:Receivables, net $(133,609) $ 82,279 $ 185,413Inventories, net (4,143) 6,383 59,138Prepaid expenses 9,092 (5,433) (9,356)Increase (decrease) in liabilities:Accounts payable 34,514 (33,882) (86,330)Accrued compensation (13,649) (5,620) (21,431)Other accrued liabilities (52,006) (26,439) (67,753)

Net change in operating working capital $(159,801) $ 17,288 $ 59,681

See accompanying Notes to Consolidated Financial Statements.

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Table of ContentsR.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYThousands of Dollars, Except Share Data

Common Stock Reacquired Common Stock UnearnedCompensation

Restricted

Stock

Retained

Earnings

OtherComprehensive

Income (Loss) TotalShares Amount Shares Amount

Balance at January 1, 2001 140,889,050 $308,462 (19,833,630) $(661,972) $ (6,752) $1,666,936 $ (74,126) $1,232,548Net income 24,988 24,988Translation adjustments (6,502) (6,502)Minimum pension liabilityadjustment (28,374) (28,374)

Comprehensive income (9,888)

Treasury stock purchases (8,812,763) (247,786) (247,786)Cash dividends (109,987) (109,987)Common shares issued understock programs 878,955 36,107 (246) (12,341) 23,520

Balance at December 31, 2001 140,889,050 $308,462 (27,767,438) $(873,651) $ (6,998) $1,569,596 $ (109,002) $ 888,407Net income 142,237 142,237Translation adjustments (10,741) (10,741)Minimum pension liabilityadjustment 4,287 4,287

Comprehensive income 135,783

Treasury stock purchases (517,560) (15,235) (15,235)Cash dividends (110,964) (110,964)Common shares issued understock programs 520,015 22,544 1,821 (7,762) 16,603

Balance at December 31, 2002 140,889,050 $308,462 (27,764,983) $(866,342) $ (5,177) $1,593,107 $ (115,456) $ 914,594Net income 176,509 176,509Translation adjustments 16,059 16,059Minimum pension liabilityadjustment (27,021) (27,021)Unrealized gain on investment 2,734 2,734

Comprehensive income 168,281

Treasury stock purchases (80,644) (2,455) (2,455)Cash dividends (115,736) (115,736)Common shares issued understock programs 630,950 28,402 2,240 (12,174) 18,468

Balance at December 31, 2003 140,889,050 $308,462 (27,214,677) $(840,395) $ (2,937) $1,641,706 $ (123,684) $ 983,152

See accompanying Notes to Consolidated Financial Statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

Basis of Consolidation—The consolidated financial statements include the accounts of RR Donnelley & Sons Company and its majority−owned subsidiaries (thecompany). Minority interests in the income (loss) of consolidated subsidiaries of $0.1 million, $0.7 million, and ($0.1) million in 2003, 2002 and 2001,respectively, are included in other income (expense) in the consolidated statements of income. All material intercompany transactions and balances have beeneliminated.

Nature of Operations—The company provides a wide variety of print and print−related services and products for customers. The company also provides logisticsand distribution services for its print customers and other mailers. Approximately 60% of the company’s business was under contract in 2003. Some contractsprovide for progress payments from customers as certain phases of the work are completed; however, revenue is not recognized until the earnings process hasbeen completed in accordance with the terms of the contracts. Some customers furnish paper for their work, while in other cases the company purchases thepaper and resells it to the customer.

Foreign Operations—Foreign−currency−denominated assets and liabilities are translated into U.S. dollars at the exchange rate existing at the respective balancesheet dates. Translation adjustments resulting from fluctuations in exchange rates are recorded as a separate component of other comprehensive income (loss)within shareholders’ equity. Income and expense items are translated at the average rates during the respective periods.

Revenue Recognition—The company recognizes print revenue when title and risk of loss transfers to the customer and the earnings process is complete.Contracts typically specify F.O.B. shipping point terms. The company generally recognizes revenue upon final shipment for a print job and not on a partialshipment basis. For most print jobs, it is common for customers to inspect the quality of the product at company facilities up to and including at the time ofshipment. The company’s products are not shipped subject to any contractual right of return provisions. Absent specific contract terms, the company recognizesrevenue upon final delivery of the product or upon completion of the service performed.

Within the company’s Financial segment, which serves the global financial services end market, the company produces highly customized materials such asregulatory S−filings, initial public offerings and mutual fund compliance communications, as well as provides EDGAR−related services. Revenue is recognizedfor these customers following final delivery of the printed product or upon completion of the service performed.

Revenues related to the company’s Premedia operations, which include digital content management such as photography, color services and page production, arerecognized in accordance with the terms of the contract, typically upon completion of the performed service and acceptance by the customer. With respect to thecompany’s Logistics segment, whose operations include the delivery of packages and printed material, the company recognizes revenue upon completion of thedelivery services it provides.

Billings for third−party shipping and handling costs are included in net sales.

Cash and Equivalents—The company considers all highly liquid debt instruments purchased with maturities of three months or less to be cash equivalents.

Receivables—Receivables primarily include trade receivables, notes receivable and miscellaneous receivables from suppliers.

Inventories—Inventories include material, labor and factory overhead and are stated at the lower of cost or market. The cost of approximately 75% and 80% ofthe inventories at December 31, 2003 and 2002, respectively, has been determined using the Last−In, First−Out (LIFO) method. This method reflects the effectof inventory replacement costs in earnings; accordingly, charges to cost of sales reflect recent costs of material, labor and factory overhead. The remaininginventories are valued using the First−In, First−Out (FIFO) or specific identification methods.

Long−lived Assets—Long−lived assets are comprised primarily of property, plant and equipment and certain identifiable intangible assets, other than goodwill.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The company is required to assess potential impairments to its long−lived assets in accordance with Statements of Financial Accounting Standards (SFAS) No.144, Accounting for Impairment of Long−Lived Assets, if events or changes in circumstances indicate that the carrying amount of an asset may not berecoverable. An impaired asset is written down to its estimated fair value based upon the most recent information available. Estimated fair market value isgenerally measured by discounting estimated future cash flows developed by the company’s management. Long−lived assets other than goodwill and intangibleassets that are held for disposal are recorded at the lower of the carrying value or the fair market value less the estimated cost to sell.

The company’s investments in affordable housing, which are included in other noncurrent assets, are recorded at cost, as adjusted for the company’s share of anydeclines in the estimated fair value of the underlying properties that are deemed to be other than temporary. Based on its ownership percentages and inability toexercise significant influence, the company accounts for its investments in affordable housing under the cost method. The company determines its estimates offair value using remaining future tax credits to be received and expected residual values upon sale or disposition of its ownership interests. Expected residualvalues are developed from industry assumptions and cash flow projections provided by the underlying partnerships, which include certain assumptions withrespect to operating costs, debt levels and certain market data related to the properties such as assumed vacancy rates.

Property, plant and equipment—Property, plant and equipment are recorded at cost and depreciated primarily on a straight−line basis over their estimated usefullives. Useful lives range from 15 to 33 years for buildings and from three to 15 years for machinery and equipment. Maintenance and repair costs are charged toexpense as incurred. Major overhauls that extend the useful lives of existing assets are capitalized. When properties are retired or disposed, the costs andaccumulated depreciation are eliminated and the resulting profit or loss is recognized in income.

Goodwill—In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, the company ceased amortization of goodwill effective January 1, 2002.Goodwill is now reviewed for impairment on an annual basis, or more frequently if events or circumstances indicate that the carrying value may not berecoverable. The review is a two−step process beginning with an estimation of the fair value of the reporting unit. The first step is a screen for impairment andthe second step measures the amount of any impairment. The fair value amounts are determined by discounting future cash flows of the reporting unit asdeveloped by management.

Financial Instruments and Interest Rate Swaps—From time to time, the company uses interest rate swaps to manage its interest rate mix and overall cost ofborrowing. Any differences paid or received on interest rate swap agreements are recognized as adjustments to interest expense over the life of each swap,thereby adjusting the effective interest rate on the underlying obligation. As defined under SFAS No. 133, Accounting for Derivative Instruments and HedgingActivities, and as described in Note 14, Financial Instruments, the company does not use interest rate swaps or other derivatives for trading or speculativepurposes.

Stock−Based Compensation—The company has stock−based employee compensation plans which are described more fully in Note 15, Stock and IncentivePrograms for Employees. The company accounts for stock−based compensation by applying Accounting Principles Board (APB) Opinion No. 25, Accountingfor Stock Issued to Employees, as allowed under SFAS No. 123, Accounting for Stock−Based Compensation. The company uses the intrinsic−value method ofaccounting for stock−based awards and has not adopted a method under SFAS No. 148, Accounting for Stock−Based Compensation—Transition and Disclosure.Accordingly, no stock−based employee compensation cost for options is reflected in net income, as all options granted under those plans had an exercise priceequal to the market value of the underlying common stock on the date of grant. Had

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

compensation cost been determined consistent with SFAS No. 123, the company’s net income and respective earnings per share would have been reduced to thefollowing pro forma amounts:

2003 2002 2001

In Thousands, except per−share dataNet income, as reported $176,509 $142,237 $ 24,988Add: Stock−based compensation expense included in reported net income, net of related tax effects 1,680 1,502 1,949Deduct: Total stock−based compensation expense determined under fair value based method, net of relatedtax effects (11,197) (11,723) (15,798)

Pro forma net income $166,992 $132,016 $ 11,139

Basic earnings per share:As reported $ 1.56 $ 1.26 $ 0.21Pro forma 1.47 1.17 0.10Diluted earnings per share:As reported $ 1.54 $ 1.24 $ 0.21Pro forma 1.46 1.15 0.09

Use of Estimates—The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The company bases its estimates onhistorical experience, actuarial valuations and various other factors that are believed to be reasonable under the circumstances, the results of which form the basisfor making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Some of those judgments can besubjective and complex and, consequently, actual results may differ from these estimates under different assumptions or conditions. While for any given estimateor assumption made by the company’s management there may be other estimates or assumptions that are reasonable, the company believes that, given the currentfacts and circumstances, it is unlikely that applying any such other reasonable estimate or assumption would materially impact the financial statements.

Comprehensive Income—Under SFAS No. 130, Reporting Comprehensive Income, comprehensive income for the company consists of net income, minimumpension liability adjustments, unrealized gains on marketable securities available for sale and foreign currency translation adjustments and is presented in theconsolidated statements of shareholders’ equity on page F−5.

Reclassifications—Certain prior year amounts have been reclassified to conform to the 2003 presentation.

Note 2. Divestitures

In December 2003, the company sold its cost basis investment in MultiMedia Live to an unrelated third−party purchaser for $2 million in cash. In connectionwith this transaction, the company recorded a pretax gain on sale of $2 million ($1 million after−tax).

In July 2003, the company sold its 25% equity investment in Global Directory Services Company to an unrelated third−party purchaser for $23 million in cash.In connection with this transaction, the company reduced goodwill by $10 million, which represented the remaining balance of the goodwill that arose at the timeof the company’s acquisition of this equity investment. The company recorded a pretax gain on sale of $4 million ($3 million after−tax).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In June 2002, the company recorded a pretax gain of $6 million ($6 million after−tax) upon collection of a note receivable that had been previously reserved inconnection with the sale of Modus Media International (MMI) in 1999.

In November 2001, the company sold its remaining investment in the common stock of Stream International for $10 million in cash. The company recognized apretax gain of $7 million ($7 million after−tax) from this transaction.

Note 3. Acquisitions and Investments

Pending acquisition—On November 8, 2003, the company entered into a combination agreement with Moore Wallace Incorporated (Moore Wallace), a leadingprovider of print management and outsourced communications. Pursuant to the terms of the agreement, a direct, wholly−owned subsidiary of the company willacquire all of the outstanding common shares of Moore Wallace whereby each share of Moore Wallace will be exchanged for 0.63 of a share of common stock ofthe company. The company expects that, upon closing of the transaction, it will issue approximately 100 million shares of its common stock, as well as undertakethe obligation for the indebtedness of Moore Wallace which was approximately $900 million as of December 31, 2003. The transaction was approved by theBoards of Directors of both the company and Moore Wallace, but remains subject to certain closing conditions that include, among others, the receipt of requiredapproval from both companies’ shareholders, and Ontario Superior Court of Justice approval of a plan of arrangement. The transaction is expected to close onFebruary 27, 2004. Total transaction costs capitalized as of December 31, 2003 were approximately $3 million, including costs directly related to both thecombination and the expected issuance of new RR Donnelley common shares in exchange for Moore Wallace shares. These costs would be charged if thetransaction were not to occur.

On March 6, 2003, the company acquired certain net assets of Momentum Logistics, Inc. (MLI), a Florida−based provider of package distribution services, forapproximately $17 million in cash. MLI operates sortation facilities and a dedicated fleet of vehicles to provide package distribution services. The purchase pricehas been allocated based on estimated fair values at the date of acquisition and resulted in $16 million of goodwill. Subsequently, the company recorded animpairment charge of $4 million for goodwill as a result of the annual impairment review performed under SFAS No. 142.

The company made no business acquisitions in 2002 or 2001.

Prior to 1996, the company acquired certain ownership interests in 26 investment level partnerships, which in turn held varying ownership percentage interests inlimited partnerships that invested in affordable housing (properties that met the Internal Revenue Service (IRS) requirements for low−income housing taxcredits). The company’s total gross investment in affordable housing was approximately $160 million. Under the provisions of the Tax Reform Act of 1986,companies that invested in affordable housing were to receive certain tax credits over a 10−year period, a portion of which was subject to recapture if a companydid not retain its investments for a minimum holding period (typically 15 years). These tax credits were provided as a legislative economic incentive to encouragecompanies to invest in properties dedicated and restricted to lower−income tenants for the 15−year holding period. The company intends to maintain itsinvestments in affordable housing for the qualifying 15−year holding periods, which begin to expire in 2008. The company’s expected recovery of itsinvestments in affordable housing is based on the future tax credits to be received and the estimated residual value of the properties. Residual value representswhat the company expects to realize upon either sale of the underlying properties or the refinancing of the partnership interests at the end of the requisite holdingperiods.

During 2003, the company recorded a non−operating pretax charge of $23 million to adjust the carrying value of its affordable housing investments to estimatedfair value based on the results of its current year impairment analysis. The reduction in fair value was based on both declining future tax credits (based on tax

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

credits realized to−date) and declines in the estimated residual values for certain of the underlying properties, which were deemed to be other than temporary.During 2002 and 2001, the company recorded non−operating pretax charges to writedown the carrying value of its affordable housing investments by $26million and $8 million, respectively. As of December 31, 2003, the company’s net investment in affordable housing was $82 million, which was included inother noncurrent assets. Projected affordable housing tax credits expected to be received by the company are $9 million in 2004, $3 million in 2005 and $1million thereafter.

Note 4. Restructuring and Impairment

The company regularly assesses its manufacturing platforms to assure that they are efficient, flexible and aligned properly with customer needs. Beginning in2001 and continuing in 2002 and 2003, the company initiated restructuring actions, which consisted primarily of the consolidation of operations within the Printand Financial segments, and the elimination of general and administrative positions company−wide. Specific elements of the restructuring activities, the relatedcosts and the current status are discussed below.

2003

In 2003, the company continued its restructuring actions to align the business with current market conditions. The 2003 pretax restructuring and impairmentcharge of $16 million ($13 million after−tax) was included as restructuring and impairment charges in the consolidated statements of income on page F−2. The2003 pretax charge included additional provisions of $23 million, which were partially offset by reversals of reserves of $7 million for settlements which weremore favorable than originally expected. The 2003 pretax charge was comprised of the following: employee termination benefits related to additional workforcereductions; curtailment loss related to postretirement benefit plans; exit costs related to closed facilities; relocation costs for defined exit activities which wereexpensed as incurred; and asset impairments. Total 2003 pretax charges, net of reversals, by segment were as follows: Print: $3 million; Logistics: $4 million;Financial: $3 million; and Other: $6 million.

The company continues to evaluate the remaining restructuring reserve as plans are being executed and, as a result, there may be additional charges or reversalsin future periods. The following summarizes the components of the charges, reversals, cash payments and non−cash adjustments during 2003 and the beginningand ending reserve balances for the year:

BalanceJanuary 1,

2003 Charges Reversals

Cash

Payments

Pension andPostretirement

Plan

Adjustments

Non−Cash

Items

BalanceDecember 31,

2003

Employee termination benefits $ 14,475 $ 5,715 $ (4,732) $ (9,166) $ (3,299) $ — $ 2,993Postretirement plan curtailment — 1,152 — — (1,152) — — Exit costs 5,532 3,102 (1,134) (6,094) — — 1,406Relocation costs — 3,712 (373) (3,339) — — — Asset impairments — 9,788 (928) — — (8,860) —

Total $ 20,007 $23,469 $ (7,167) $(18,599) $ (4,451) $ (8,860) $ 4,399

The components of the 2003 charges included:

• Employee termination benefits associated with 314 employees, including severance and outplacement costs of $6 million. Of this charge, $3 millionrepresented early retirement benefit costs to be financed by the company’s various retirement benefit plans. As of December 31, 2003, 282 of theseseparations were completed. The completed and future employee separations relate primarily to the Print and

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Financial segments. The majority of the remaining separations are expected to be completed by the end of the first quarter of 2004. 2003 alsoincluded $5 million of restructuring income to reverse previously recorded reserves for employee terminations due to a higher number of employeeswho transferred to other positions in the company than originally expected.

• A $1 million curtailment loss related to the company’s postretirement benefit plan. This charge was recorded in the Corporate segment. Thecurtailment loss represented an increase in the accumulated postretirement benefit obligation and the recognition of prior service costs due toworkforce reductions in 2002, subsequent to the September 30, 2002, measurement date for the postretirement benefit plan.

• Exit costs of $3 million. Exit costs comprised expected remaining future cash outlays associated with maintaining closed facilities until the date ofsale or lease termination, including remaining lease payments and other building−related costs. 2003 also included $1 million of restructuringincome to reverse previously recorded reserves for favorable settlements.

• Relocation costs of $4 million for employees transferred from closed facilities, as well as equipment transfer charges. These charges were expensedon an as−incurred basis.

• Asset impairments of $10 million, including property, plant and equipment write−downs of $6 million and goodwill write−downs of $4 million. Ofthis charge, $4 million related to goodwill impairment for MLI, $3 million related to the closing of a directory plant in Chile, and $3 million relatedto anticipated losses on the disposal of buildings. 2003 also included $1 million of restructuring income to reverse previously impaired assets whichwere transferred to other divisions.

2002

In 2002, due to declining market conditions, the company initiated restructuring actions to align the business with current market conditions. The total 2002pretax restructuring and impairment charge of $89 million ($54 million after−tax) was included as restructuring and impairment charges in the consolidatedstatements of income on page F−2. The 2002 pretax charge was comprised of the following: employee termination benefits related to additional workforcereductions; plan curtailment loss related to postretirement benefit plans; exit costs related to closed facilities; relocation costs for defined exit activities whichwere expensed as incurred; and asset impairments to reduce the carrying values of assets held for sale to estimated fair value. Total 2002 pretax charges bysegment were as follows: Print: $55 million; Logistics: $2 million; Financial: $10 million; Corporate: $16 million; and Other: $6 million.

The following summarizes the components of the charges, cash payments, and non−cash adjustments during 2002 and the beginning and ending reserve balancesfor the year:

BalanceJanuary 1,

2002 Charges

Cash

Payments

Pension andPostretirement

Plan

Adjustments

Non−Cash

Items

BalanceDecember 31,

2002

In ThousandsEmployee termination benefits $25,291 $37,104 $(25,025) $ (22,895) $ — $ 14,475Postretirement plan curtailment — 8,372 — (8,372) — — Exit costs 8,638 5,473 (8,579) — — 5,532Relocation costs — 22,278 (22,278) — — — Asset impairments — 15,702 — — (15,702) —

Total $33,929 $88,929 $(55,882) $ (31,267) $(15,702) $ 20,007

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The components of the 2002 charges included:

• Employee termination benefits associated with 1,798 employees, including severance, early retirement benefit costs and outplacement costs of $37million. Of this charge, $23 million represented early retirement benefit costs to be financed by the company’s various retirement benefit plans. Asof December 31, 2003, all of these separations were completed.

• An $8 million curtailment loss related to the company’s postretirement benefit plan. This charge was recorded in the Corporate segment. Thecurtailment loss represented the increase in the accumulated postretirement benefit obligation and the recognition of prior service costs related to thereduction in the number of employees due to workforce reductions.

• Exit costs of $6 million. Exit costs comprised expected remaining future cash outlays associated with maintaining closed facilities until the date ofsale or lease termination, including remaining lease payments, lease termination payments, restoration costs and other building−related costs.

• Relocation costs of $22 million for employees transferred from closed facilities, as well as equipment transfer charges. These charges were expensedon an as−incurred basis, and related primarily to plant closures announced within the Print segment in 2001, as well as the Berea, Ohio closure in2002.

• Asset impairments of $16 million, including property, plant and equipment write−downs, primarily related to facility closings. Of this charge, $5million related to the closing of the Berea, Ohio facility in the second quarter of 2002. Also included in 2002 was an additional $9 million inwrite−downs for anticipated losses on the disposal of buildings, the majority of which related to announced closings made in 2001.

2001

In 2001, as part of efforts to build a more effective print platform, the company announced the closures of seven facilities, and additional workforce reductionsand consolidations at several other facilities, including a company−wide reduction of 250 administrative positions. Total pretax business restructuring chargesand asset impairments of $106 million related to restructuring actions were recorded by segment as follows: Print: $86 million; Logistics: $1 million; Financial:$8 million; Corporate: $4 million; and Other: $7 million. The 2001 pretax charge was comprised of the following: employee termination benefits related toadditional workforce reductions; exit costs related to closed facilities; relocation costs for defined exit activities which were expensed as incurred; and assetimpairments to reduce the carrying values of assets held for sale to estimated fair value.

Also in 2001, the company recorded a pretax impairment charge of $90 million to adjust the carrying values of certain of its businesses to estimated fair value.The impairment charges reduced goodwill by $36 million and property and equipment by $54 million and were recorded by segment as follows: Print: $11million and Other: $79 million, comprised of Direct Mail ($37 million) and International (Argentina: $19 million; Brazil: $11 million; and Mexico: $12 million),as described more fully below.

During 2001, both the Newark, Ohio and Berea, Ohio facilities generated significant shortfalls in net sales from their original acquisition plans. The Newarkfacility also experienced deterioration in operating performance following the consolidation in 2000 of another Direct Mail facility into Newark. Based on thecompany’s review for impairment as determined in accordance with SFAS No. 121, the company recorded a pretax impairment charge for Newark in 2001 of$37 million ($26 million after−tax) that included writedowns of $10 million for goodwill and $27 million for property and equipment. The total pretaximpairment charge for Berea of $11 million ($7 million after−tax) was related entirely to goodwill.

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The deterioration in the Argentine economy during 2001 led the company to re−evaluate its wholly−owned investment in Argentina in accordance with SFASNo. 121. Based on that assessment, the company recorded a pretax impairment charge in 2001 of $19 million ($19 million after−tax) to reduce the value of itsinvestment. The charge included write−downs of $2 million for goodwill and $17 million for property and equipment. During the fourth quarter of 2001, thecompany announced plans to consolidate its two Brazilian book operations (Circulo do Livro and Hamburg Gráfica Editora) into one facility to streamline costs,and to sell its Hamburg Gráfica Editora plant. The total pretax impairment charge for Brazil of $11 million ($8 million after−tax) included write−downs of $3million for goodwill and $8 million for property and equipment.

During the third quarter of 2001, the company re−evaluated its investment in Ediciones Eclipse S.A. de C.V. in Mexico (Eclipse, acquired in 1998) following theloss of several key customers and poor operating performance. Based on the re−evaluation, the company recorded a pretax impairment charge for Eclipse of $12million ($12 million after−tax) that included write−downs of $10 million for goodwill and $2 million for property and equipment. During the fourth quarter of2001, the company closed its Eclipse operations.

The total 2001 pretax restructuring and impairment charge of $196 million ($137 million after−tax) was included as restructuring and impairment charges in theconsolidated statements of income on page F−2.

The following summarizes the components of the charges, cash payments, and non−cash adjustments during 2001 and the beginning and ending reserve balancesfor the year:

BalanceJanuary 1,

2001 Charges

Cash

Payments

Pension andPostretirement

Plan

Adjustments

Non−cash

Items

BalanceDecember 31,

2001

In ThousandsEmployee termination benefits $ — $ 60,390 $(15,963) $ (19,122) $ (14) $ 25,291Exit costs — 11,980 (3,335) — (7) 8,638Relocation costs — 16,783 (16,592) (191) — — Asset impairments — 106,392 — — (106,392) —

Total $ — $ 195,545 $(35,890) $ (19,313) $(106,413) $ 33,929

The components of the 2001 charges included:

• Employee termination benefits associated with 2,850 employees, including severance, early retirement benefit costs and outplacement costs of $60million. Of this charge, $19 million represented early retirement benefit costs to be financed by the company’s various retirement benefit plans. Asof December 31, 2003, all of these separations were completed.

• Exit costs of $12 million. Exit costs comprised expected remaining future cash outlays associated with maintaining closed facilities until the date ofsale or lease termination, including remaining lease payments, lease termination payments, restoration costs and other building−related costs.

• Relocation costs of $17 million for employees transferred from closed facilities, as well as equipment transfer charges. These charges were expensedon an as−incurred basis.

• Asset impairments of $106 million, including property, plant and equipment and goodwill write−downs of $70 million and $36 million,respectively.

Status of the restructuring plans

As of December 31, 2003, the company’s 2003 restructuring plans are substantially complete, except for remaining employee termination benefits of $3 million,the majority of which is expected to be paid in the first

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quarter of 2004. During the fourth quarter of 2003, the company ceased operations at its directory plant in Chile. All continuing customer work has beentransferred to other company facilities. The remaining net book value of the related property, plant and equipment at December 31, 2003, was $3 million; theseassets were considered held−for−sale at December 31, 2003. Additional charges related to the 2003 restructuring plans are expected to be minimal.

In connection with the 2002 and 2001 restructuring plans, the company has ceased print production at its St. Petersburg, Florida; Des Moines, Iowa; OldSaybrook, Connecticut and Berea, Ohio facilities, and all continuing customer work has been transferred to other company facilities. The net book value of therelated property, plant and equipment at December 31, 2003 was $5 million; these assets were considered held−for−sale at December 31, 2003. Additionalcharges related to the 2002 and 2001 restructuring plans are expected to be minimal.

In 2003, the company sold its Hamburg Gráfica Editora facility in Brazil for $2 million in cash; no significant gain or loss was recognized on this transaction.The company also sold its plant in South Daytona, Florida, in 2003 for $4 million; this resulted in an additional impairment charge of $1 million in 2003.

As of December 31, 2003, a total of 4,930 terminations have been completed under the restructuring plans announced in 2003, 2002 and 2001.

The total net book value of assets to be disposed of under the restructuring plans as of December 31, 2003, as discussed above, was $8 million, related primarilyto the Print segment. These assets are comprised primarily of land, buildings and related equipment. These assets have been reviewed under SFAS No. 144 andreflect the estimated fair value, less costs to sell.

Note 5. Goodwill and Other Intangible Assets

In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142. SFAS No. 141 requires that all business combinations initiated afterJune 30, 2001 be accounted for using the purchase method of accounting. SFAS No. 142 requires that goodwill not be amortized over an estimated useful life.Instead, goodwill must be assessed for impairment at least annually by applying a fair−value−based test.

SFAS No. 142 prohibits the restatement of prior year financial statements. For comparison purposes, the following table presents the 2001 amounts adjusted toexclude amortization expense related to goodwill that is no longer being amortized in 2002 and 2003.

December 31

Thousands of dollars, except per−share data 2003 2002 2001

Net Income:Reported net income $ 176,509 $ 142,237 $24,988Goodwill amortization, net of tax — — 13,393

Adjusted net income $ 176,509 $ 142,237 $38,381

Basic Earnings Per Share:Reported basic earnings $ 1.56 $ 1.26 $ 0.21Goodwill amortization, net of tax — — 0.11

Adjusted basic earnings $ 1.56 $ 1.26 $ 0.32

Diluted Earnings Per Share:Reported diluted earnings $ 1.54 $ 1.24 $ 0.21Goodwill amortization, net of tax — — 0.11

Adjusted diluted earnings $ 1.54 $ 1.24 $ 0.32

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Goodwill associated with each of the company’s business segments and changes in those amounts during the period were as follows:

Thousands of dollars

Net Book Value

at January 1, 2002 AcquisitionsForeign Exchange/

Other Disposition

Net Book Valueat

December 31, 2002

Print $ 80,552 $ — $ — $ — $ 80,552Logistics 150,344 — (1,032) — 149,312Financial 23,095 — 401 — 23,496Other (1) 58,622 — (2,008) (1,800) 54,814

$ 312,613 $ — $ (2,639) $ (1,800) $ 308,174

Thousands of dollars

Net Book Value

at January 1, 2003 AcquisitionsForeign Exchange/

OtherImpairments/Dispositions

Net Book Valueat

December 31, 2003

Print $ 80,552 $ — $ — $ (9,732) $ 70,820Logistics 149,312 16,051 — (3,992) 161,371Financial 23,496 — — — 23,496Other (1) 54,814 — 6,971 — 61,785

$ 308,174 $ 16,051 $ 6,971 $ (13,724) $ 317,472

(1) Represents other operating units of the company, including Direct Mail, International and Other.

Other intangible assets primarily consist of the costs of acquiring print contracts and volume guarantees that are amortized primarily as a reduction to net salesover the periods in which benefits will be realized.

In 2003, the company recorded a pretax impairment charge of $4 million for goodwill related to MLI as, based on the annual impairment test performed underSFAS No. 142, the company determined that the estimated future cash flows of MLI would not be sufficient to fully recover its current carrying value.

Amortization expense for intangible assets subject to amortization was $30 million, $35 million and $37 million for 2003, 2002 and 2001, respectively.

Note 6. Inventories

The components of the company’s inventories were as follows:

December 31

2003 2002

In ThousandsRaw materials and manufacturing supplies $ 84,289 $ 83,701Work in process 110,642 108,947Finished goods 9,501 1,824Progress billings (33,914) (28,977)LIFO reserve (50,144) (49,304)

Total $120,374 $116,191

Progress billings represent customer prepayments for raw materials or work in progress.

For financial reporting purposes, the company recognized LIFO expense of $1 million in 2003, LIFO income of $5 million in 2002 and LIFO expense of $4million in 2001. The company uses the external−index method of valuing LIFO inventories.

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Note 7. Property, Plant and Equipment

The following table summarizes the components of property, plant and equipment (at cost):

December 31

2003 2002

In ThousandsLand $ 33,911 $ 35,190Buildings 731,885 739,787Machinery and equipment 4,089,219 4,068,210

Total $ 4,855,015 $ 4,843,187

Note 8. Commitments and Contingencies

As of December 31, 2003, authorized expenditures on incomplete projects for the purchase of property, plant and equipment totaled $251 million. Of this total,$81 million has been contractually committed. The company also has a contractual commitment of approximately $25 million for various outsourcedprofessional services. The company also has a variety of contracts with suppliers for the purchase of paper, ink and other commodities for delivery in future yearsat prevailing market prices. There are no minimum volume guarantees associated with these contracts.

The company has non−cancelable operating lease commitments totaling $225 million extending through various periods to 2016. The lease commitments total$57 million for 2004, range from $13 million to $50 million in each of the years 2005 through 2008 and total $28 million for years 2009 and thereafter.

The company is not exposed to significant accounts receivable credit risk due to its customer diversity with respect to industry classification, distributionchannels and geographic locations.

See Note 3, Acquisitions and Investments, for discussion of certain contingencies related to the company’s anticipated combination with Moore Wallace.

Litigation

On December 18, 1995, a class action was filed against the company in federal district court in Chicago alleging that older workers were discriminated against inselection for termination upon the closing of the Chicago catalog operations (Gerlib, et al. v. R.R. Donnelley & Sons Co.). The suit also alleged that the companyviolated the Employee Retirement Income Security Act (ERISA) in determining benefits payable under its Retirement Benefit and Separation Pay Plans toretiring or terminated employees.

On November 25, 1996, a class action was brought against the company in federal district court in Chicago, Illinois, on behalf of current and formerAfrican−American employees, alleging that the company racially discriminated against them in violation of Section 1981 of the Civil Rights Act of 1871, asamended, and the U.S. Constitution (Jones, et al. v. R.R. Donnelley & Sons Co.). The complaint seeks declaratory and injunctive relief, and asks for actual,compensatory, consequential and punitive damages in an amount not less than $500 million.

On June 30, 1998, a class action was filed against the company in federal district court in Chicago on behalf of current and former African−American employees,alleging that the company racially discriminated against them in violation of Title VII of the Civil Rights Act of 1964 (Adams, et al. v. R.R. Donnelley & SonsCo.).

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While making many of the same general discrimination claims contained in the Jones complaint, the Adams plaintiffs also claimed retaliation by the company forthe filing of discrimination charges or otherwise complaining of race discrimination.

On December 28, 2000, a purported class action was brought against the company and certain of its benefit plans in federal district court in Chicago on behalf ofcertain former employees of the Chicago catalog operations (Jefferson, et al. v. R.R. Donnelley & Sons Co., et al.). The suit alleged that enhanced pensionbenefits were not paid to plaintiffs and that plaintiffs are being required to contribute to the costs of retiree medical coverage, both allegedly in violation of plandocuments and ERISA.

On April 6, 2001, in an amended opinion, the district court judge in the Jones and Adams cases certified three plaintiff classes in the actions: a class consisting ofAfrican−American employees discharged in connection with the shutdown of the Chicago catalog operations; a class consisting of African−American employeesof the Chicago catalog operations after November 1992 who were other than permanent employees; and a class consisting of African−Americans subjected to anallegedly hostile working environment at the Chicago catalog operations, the Chicago Financial, Pontiac or Dwight, Illinois, manufacturing operations.

Following fairness hearings held in March and April, 2003, the district court approved settlements resolving all of the issues in the Adams, Gerlib and Jeffersoncases and the issues in Jones which related to claims arising in locations other than the Chicago catalog operations without any admission of wrongdoing by thecompany. The total amount paid in connection with the settlements was $21 million, of which $9 million was paid by the company’s Retirement Benefit Plan.The total pretax charge during 2002 related to these settlements was $16 million and was recorded in cost of sales in the consolidated statements of income onpage F−2.

In a decision issued September 16, 2002, the Seventh Circuit Court of Appeals overturned a ruling by the trial court and held that a two−year statute oflimitations applies to the claims in Jones filed under Section 1981 of the Civil Rights Act. The court of appeals remanded the case for further proceedingsconsistent with its opinion, and on November 21, 2002, the court of appeals denied plaintiffs’ petition for rehearing. On May 19, 2003, the United StatesSupreme Court agreed to review the issue of the appropriate statute of limitations to apply and has the matter scheduled for argument on February 24, 2004.

While the settlements described dispose of the Adams, Gerlib and Jefferson cases, and a portion of the Jones litigation, the issue relating to the application of thestatute of limitations to certain of the discrimination claims in the Jones case has not been finally decided. Management is unable to make a meaningful estimateof the overall loss, if any, that could result from an unfavorable final determination of this matter.

The company has been designated as a potentially responsible party in 13 federal and state Superfund sites. In addition to the Superfund sites, the company mayalso have the obligation to remediate five other previously−owned facilities; the company’s share of these remediation costs is estimated to be less than $1million. The company has established reserves that are believed to be adequate to cover its share of the potential costs of remediating each of the Superfund sitesand the previously−owned facilities. Although management believes its estimates are reasonable and are based on the latest available information, the cleanupcosts are estimates and are subject to revision as more information about the extent of the remediation required becomes available. At the Superfund sites, theComprehensive Environmental Response, Compensation and Liability Act provides that the company’s liability could be joint and several, meaning that thecompany could be required to pay an amount in excess of its proportionate share of the remediation costs. The company’s understanding of the financial strengthof other potentially responsible parties at the Superfund sites and of other liable parties at the previously−owned facilities has been considered, whereappropriate, in the determination of its estimated liability. Management

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believes that any Superfund costs associated with the company’s current status as a potentially responsible party in the Superfund sites or as a liable party at thepreviously−owned facilities will not be material to the company’s financial position, results of operations or cash flows.

From time to time, customers of the company file voluntary petitions for reorganization under U.S. bankruptcy laws. In such cases, certain pre−petition paymentsreceived by the company could be considered preference items and subject to return to the bankruptcy administrator. The company believes that the finalresolution of these preference items will not have a material adverse effect on the company’s consolidated financial position, results of operations or cash flows.

In addition, the company is a party to certain litigation arising in the ordinary course of business which, in the opinion of management, will not have a materialadverse effect on the company’s financial position, results of operations or cash flows.

Note 9. Retirement Plans

The company maintains seven principal retirement plans: the Retirement Benefit Plan of R.R. Donnelley & Sons Company (the Retirement Benefit Plan or thePlan) (the primary R.R. Donnelley retirement plan); an unfunded Supplemental Benefit Plan; the Haddon Craftsmen, Inc. Retirement Plan; the R.R. DonnelleyU.K. Pension Plan; the Merged Retirement Income Plan for Employees at R.R. Donnelley Printing Company, L.P. and R.R. Donnelley Printing Company; theSupplemental Unfunded Retirement Income Plan for Employees of Meredith−Burda Corporation Limited Partnership; and Retirement Income Plan forEmployees of Meredith−Burda Corporation. Participants of these last three plans no longer accrue benefits under such plans; all qualified active employees of thecompany who formerly participated in these plans are current participants of the Retirement Benefit Plan.

The Retirement Benefit Plan is a noncontributory defined benefit plan. Substantially all U.S. employees age 21 or older are covered by the Plan. Normalretirement age is 65, but reduced early retirement benefits are paid to fully vested participants at or after age 55. The company uses the projected unit creditactuarial cost method to determine pension cost for financial reporting purposes. In conjunction with this method, the company amortizes deferred gains andlosses (using the corridor method) and prior service costs over the average remaining service life of its active employee population. In addition, a transition credit(the excess of Plan assets plus balance sheet accruals over the projected obligation as of January 1, 1987) is being amortized over 19 years. For tax and fundingpurposes, the entry age normal actuarial cost method is used. Plan assets consist primarily of marketable equity securities and government and corporate fixedincome securities which are valued using market quotations. In the event of Plan termination, the Plan provides that no funds can revert to the company and anyexcess assets over Plan liabilities must be used to fund retirement benefits.

In addition to pension benefits, the company provides certain healthcare and life insurance benefits for retired employees. Most of the company’s regularfull−time U.S. employees become eligible for these benefits upon reaching age 55 while working for the company and having 10 years of continuous service atretirement. For employees who began employment with the company prior to January 1, 2002, the company subsidizes coverage and funds liabilities associatedwith these plans through a tax−exempt trust. The assets of the trust are invested primarily in marketable equity securities and government and corporate fixedincome securities under a life insurance contract covering certain of the company’s employees.

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The following represents the obligations and plan assets at fair value for the company’s pension and postretirement benefit plans at the respective year−end basedon a measurement date of September 30:

Pension Benefits Postretirement Benefits

2003 2002 2003 2002

In ThousandsBenefit obligation at beginning of year $1,634,847 $1,500,373 $306,969 $275,905Service cost 48,194 52,313 12,114 11,553Interest cost 106,460 102,256 19,960 18,566Plan participants’ contributions 1,001 874 3,049 3,678Amendments — 14,767 (6,198) — Actuarial loss 142,228 60,329 23,755 11,480Acquisitions/plan initiations/curtailments (1) — — 1,290 9,728Special termination benefits (2) 3,299 22,895 — — Provision for litigation settlement expense funded by plan benefits (3) — 9,100 — — Expected benefits paid (111,923) (128,060) (32,423) (23,941)

Benefit obligation at end of year $1,824,106 $1,634,847 $328,516 $306,969

(1) 2003 and 2002 postretirement benefits include $1 million and $8 million, respectively, in curtailment losses related to the reduction in the number ofbenefit eligible employees resulting from restructuring actions. See Note 4, Restructuring and Impairment, to the consolidated financial statements.

(2) See Note 4, Restructuring and Impairment, to the consolidated financial statements.(3) See Note 8, Commitments and Contingencies, to the consolidated financial statements.

Pension Benefits Postretirement Benefits

2003 2002 2003 2002

In ThousandsFair value of plan assets at beginning of year $1,486,786 $1,733,870 $215,615 $257,357Actual gain (loss) 349,132 (124,376) 26,873 (21,479)Employer contribution 6,098 4,478 — — Plan participants’ contributions 1,001 874 3,049 3,678Expected benefits paid (111,923) (128,060) (32,423) (23,941)

Fair value of plan assets at end of year $1,731,094 $1,486,786 $213,114 $215,615

The funded status of the plans reconciles with amounts on the consolidated balance sheets as follows:

Pension Benefits Postretirement Benefits

2003 2002 2003 2002

In ThousandsFunded status $ (93,012) $(148,061) $(115,401) $(91,354)Unrecognized transition obligation (21,144) (31,973) — — Unrecognized net actuarial loss 384,856 438,703 115,591 94,164Unrecognized prior service cost (benefit) 37,067 41,068 (12,221) (8,477)Fourth quarter contribution 969 298 — —

Net benefit cost recognized on the consolidated balance sheet $308,736 $ 300,035 $ (12,031) $ (5,667)

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Amounts recognized in the consolidated balance sheets consist of:

Pension Benefits Postretirement Benefits

2003 2002 2003 2002

In ThousandsPrepaid benefit cost $314,366 $335,455 $ — $ — Accrued benefit cost (included in Other noncurrent liabilities) (98,487) (75,636) (12,031) (5,667)Intangible asset 4,731 216 — — Deferred income taxes 35,251 14,147 — — Accumulated other comprehensive income 52,875 25,853 — —

Net benefit cost recognized on the consolidatedbalance sheet $308,736 $300,035 $(12,031) $(5,667)

The accumulated benefit obligation for all defined benefit pension plans was $1,672 million and $1,477 million at September 30, 2003 and 2002, respectively.

The company recognizes a minimum pension liability when the accumulated benefit obligation for a plan exceeds the fair value of the respective plan’s assets. Ofthe total minimum pension liability as of December 31, 2003 and 2002, $46 million and $37 million, respectively, related to the R.R. Donnelley U.K. pensionplan (the U.K. pension plan). In 2003, a minimum pension liability of $35 million was recorded for the Merged Retirement Income Plan for Employees at RRDonnelley Printing Company, L.P. There was no minimum pension liability related to this plan in 2002. The remaining minimum pension liability relates to thecompany’s unfunded Supplemental Benefit Plan and the Haddon Craftsmen, Inc. Retirement Plan. The increase in minimum pension liability during 2003 relatedto the U.K. pension plan and the Merged Retirement Income Plan for Employees at RR Donnelley Printing Company, L.P. included a $37 million increase in theaccumulated benefit obligation, partially offset by an $18 million increase in the fair value of plan assets. The minimum pension liability for the U.K pensionplan arose in 2002 primarily as a result of an increase in the accumulated benefit obligation primarily due to foreign exchange and a decline in the fair value ofplan assets.

The weighted average assumptions used in the actuarial computation that derived the above funded status amounts were as follows:

Pension Benefits Postretirement Benefits

2003 2002 2001 2003 2002 2001

Discount rate 6.0% 6.7% 7.0% 6.0% 6.8% 7.0%Expected return on plan assets 8.9% 9.4% 9.4% 8.5% 9.0% 9.0%Average rate of compensation increase 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%

The weighted average assumptions used in the actuarial computation that derived net periodic benefit income (expense) were as follows:

Pension Benefits Postretirement Benefits

2003 2002 2001 2003 2002 2001

Discount rate 6.7% 6.9% 7.2% 6.8% 7.0% 7.3%Expected return on plan assets 8.9% 9.4% 9.4% 8.5% 9.0% 9.0%Average rate of compensation increase 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%

For purposes of determining the funded status of the company’s various pension plans as of the plans’ measurement date (September 30, 2003), the companyassumed a weighted−average discount rate of 6.0%. As a basis for sensitivity analysis, a one−percentage−point decline in the assumed discount rate for thecompany’s

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pension plans to 5.0% would result in an estimated additional charge to other comprehensive income (a component of shareholders’ equity) of approximately$212 million. Under the company’s assumptions for 2003, the U.K. pension plan, the Merged Retirement Income Plan for Employees at RR Donnelley PrintingCompany, L.P., and two of the company’s smaller plans recognized an additional minimum liability. By applying a 5.0% discount rate and holding otherassumptions constant, the fair value of plan assets for the company’s Retirement Benefit Plan would fall below the accumulated benefit obligation in 2003,resulting in the recognition of an additional minimum liability. The breakdown of the estimated $212 million charge to shareholders’ equity following aone−percentage−point decline in discount rate by plan would be as follows: Retirement Benefit Plan ($187 million); the U.K. pension plan ($15 million) andother plans: ($10 million).

For measuring other postretirement benefits, an 8.2% annual rate of increase in the per−capita cost of covered healthcare benefits was assumed for 2003 (thetrend rate occurring during 2003 to arrive at 2004 levels). The rate was assumed to decrease gradually to 5.0% by 2008 and remain at that level thereafter.

The components of the net periodic benefit expense (income) and total expense (income) were as follows:

Pension Benefits Postretirement Benefits

2003 2002 2001 2003 2002 2001

In ThousandsService cost $ 48,194 $ 52,313 $ 52,521 $ 12,114 $ 11,553 $ 10,815Interest cost 106,460 102,256 93,035 19,960 18,566 17,406Expected return on plan assets (157,371) (170,923) (164,703) (24,802) (27,495) (27,229)Amortization of transition obligation (10,882) (10,828) (10,768) — — — Amortization of prior service cost 4,001 3,747 3,527 (2,318) (2,845) (8,562)Amortization of actuarial (gain) loss 4,075 2,759 (484) 258 — (1,592)

Net periodic benefit (income) expense (5,523) (20,676) (26,872) 5,212 (221) (9,162)Curtailment loss — — — 1,152 8,372 — Special termination benefit cost 3,299 22,895 19,313 — — 565Provision for litigation settlement to be funded byplan benefits — 9,100 — — — — Settlement expense — 512 — — — —

Total expense (income) $ (2,224) $ 11,831 $ (7,559) $ 6,364 $ 8,151 $ (8,597)

The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for all pension plans with accumulated benefit obligations in excessof plan assets were $255 million, $249 million and $149 million, respectively, in 2003 and $182 million, $161 million and $89 million, respectively, in 2002.

Assumed health care cost trend rates have a significant effect on the amounts reported for postretirement benefits. A one−percentage−point change in assumedhealthcare cost trend rates would have had the following effects in 2003:

1% Increase 1% Decrease

In ThousandsEffect on total of service and interest cost components $ 446 $ (457)Effect on postretirement benefit obligation 5,211 (5,113)

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The allocation of the fair value of plan assets was as follows:

% of Total

2003 2002

Equity 65% 64%International equities 22 21Fixed income securities 12 14Cash and equivalents 1 1

Total 100% 100%

The company employs a total return investment approach for its pension and postretirement benefit plans whereby a mix of equities and fixed incomeinvestments are used to maximize the long−term return of pension and postretirement plan assets. The intent of this strategy is to minimize plan expenses byoutperforming plan liabilities over the long run. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and corporatefinancial condition. The investment portfolio contains a diversified blend of equity and fixed−income investments. Furthermore, equity investments arediversified across geography and market capitalization through investments in U.S. large−capitalization stocks, U.S. small−capitalization stocks and internationalsecurities. Investment risk is measured and monitored on an ongoing basis through annual liability measurements, periodic asset/liability studies and quarterlyinvestment portfolio reviews.

The long−term rate of return for plan assets is determined using a weighted average of long−term historical returns on equity and fixed income securities basedon our respective plan allocations. Historical markets are studied and long−term historical relationships between equities and fixed income securities arepreserved congruent with the widely accepted capital market principle that assets with higher volatility generate greater returns over the long run. By assuminghistorical returns of 10% for equity and 6% for fixed income securities as a benchmark, the weighted−average expected return based on the pension plan assetallocation would be 9.6%, compared with the company’s assumed rate of return of 8.9% for 2003, and the weighted average expected return based on thepostretirement benefit allocation would be 9.0%, compared with the company’s assumed rate of 8.5% for 2003.

The company expects to make approximately $17 million of cash contributions to its pension plans in 2004.

Employee 401(k) Savings Plan—The company maintains a savings plan that is qualified under Section 401(k) of the Internal Revenue Code. Substantially all ofthe company’s U.S. employees are eligible for this plan. Under provisions for this plan, employees may contribute up to 15% of eligible compensation on abefore−tax basis and up to 10% of eligible compensation on an after−tax basis. The company generally matches 50% of a participating employee’s first 3% ofbefore−tax contributions. The total expense attributable to the match was $11 million in both 2003 and 2002.

Note 10. Income Taxes

The components of income tax expense (benefit) for the years ending December 31, 2003, 2002 and 2001, were as follows:

2003 2002 2001

In ThousandsFederal:Current $ 47,616 $40,981 $ 70,990Deferred (6,687) (7,101) (30,230)State:Current 6,853 7,579 5,355Deferred (16,014) (7,963) 3,791

Total $ 31,768 $33,496 $ 49,906

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The significant deferred tax assets and liabilities were as follows:

December 31

2003 2002

In ThousandsDeferred tax liabilities:Accelerated depreciation $ 184,665 $ 164,720Investments 34,445 38,855Pensions 96,957 119,948Other 84,748 72,352

Total deferred tax liabilities 400,815 395,875

Deferred tax assets:Accrued liabilities 123,035 120,295Net operating loss and other tax carryforwards 37,445 48,640Investments 2,015 8,948Other 91,679 87,384

Total deferred tax assets 254,174 265,267Valuation allowance 34,381 45,131

Net deferred tax liabilities $ 181,022 $ 175,739

Included in 2003 is a tax benefit of $46 million including a non−cash benefit of $40 million due to the favorable resolution of IRS audits for 1996 through 1999.In addition, the Company recorded a $6 million receivable for refundable income taxes in Latin America due to the utilization of tax loss carrybacks.

The company has used corporate−owned life insurance (COLI) to fund employee benefits for several years. In 1996, the United States Health Care Reform Actwas passed, eliminating the deduction for interest from loans borrowed against COLI programs. 1998 was the final year of the phase−out for deductions. Inseveral federal court decisions involving different corporate taxpayers, the courts disallowed deductions for loans against those taxpayers’ COLI programs. In itsaudit of the company’s 1990 to 1992 tax returns, the IRS disallowed the deductions taken by the company.

On April 1, 2002, the company reached a settlement agreement with the IRS resolving all disputes over the tax deductibility of interest on loans taken out againstits COLI programs. As part of the settlement, the company agreed to the disallowance of 80% of its interest deductions on loans related to its COLI programsfrom 1990 through 1998. Based upon the 80% settlement, the company’s exposure for all years was approximately $217 million in taxes and interest, after−tax,of which $62 million ($55 million after−tax) was paid prior to 2002. The company has satisfied approximately $191 million ($157 million after−tax) of theremaining liability to the IRS and state tax authorities. The remaining amount owed is classified in the accompanying consolidated balance sheet as currentincome taxes payable.

As part of the settlement with the IRS, the company also surrendered approximately 17,000, or 61%, of its outstanding COLI policies to the insurance carriers inApril 2002. The IRS agreed to an 80% reduction of the taxable portion of the gain related to the surrender of the COLI policies. The tax at 40% on the remaining20% gain upon surrender of the policies resulted in additional amounts owed to the IRS of $18 million. In April 2002, the company received $12 million in netcash surrender value related to the policies surrendered.

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As a result of the company’s settlement agreement with the IRS, the company reduced its tax reserves related to COLI to equal the settlement amounts.Accordingly, in the first quarter of 2002, the company recorded a tax benefit of $30 million to reflect the reduction in tax reserves. In addition, the companyrecorded a pretax charge of $5 million in the first quarter of 2002 related to the surrender of the above COLI policies, which is classified in other income(expense), net, in the accompanying consolidated statements of income.

The following table outlines the reconciliation of differences between the U.S. statutory tax rates and the rates used by the company in determining net income:

2003 2002 2001

Federal statutory rate 35.0% 35.0% 35.0%Restructuring and impairment charge 0.7 (2.1) 3.4Sale of Stream entities — (1.2) (3.1)Foreign tax rates over U.S. statutory rate (4.6) 0.8 1.2State and local income taxes, net of U.S. federal income tax benefit 4.4 6.3 16.9Goodwill amortization — — 3.2Effects resulting from COLI (0.1) (14.8) 10.7Resolution of of IRS audits (1996−1999) (19.2) — — Affordable housing investment credits (6.4) (9.2) (24.5)Change in valuation allowance (5.2) (3.1) 17.4Other 10.7 7.4 6.4

Total 15.3% 19.1% 66.6%

As of December 31, 2003, the company had domestic and foreign tax loss carryforwards of approximately $13 million and $24 million, respectively. $29 millionof these tax loss carryforwards expire between 2004 and 2012. Limitations on the utilization of these tax assets may apply; accordingly, the company hasprovided a valuation allowance to reduce certain of these deferred tax assets, as management has concluded that, based on the weight of available evidence, it ismore likely than not that the deferred tax assets will not be fully realized. During the year ended December 31, 2003, the valuation allowance decreased by $11million primarily due to a decrease in the allowance associated with the company’s capital loss carryforwards. This decrease was a result of the company’sdecision in 2003 to utilize capital loss carryforwards to offset a capital gain resulting from the April 2002 surrender of COLI policies.

During the year ended December 31, 2002, the valuation allowance decreased by $5 million resulting from changes in the realizability of an acquiredsubsidiary’s deferred tax assets due to the finalization of annual tax audits for the year the subsidiary was acquired. During the year ended December 31, 2001,the valuation allowance increased $11 million primarily due to an increase in the valuation allowance associated with the company’s foreign net operating lossesin Mexico and Argentina. It is the company’s policy to not record a tax benefit for net operating losses in countries with a limited net operating losscarry−forward period. Additionally, no provision has been recorded on unremitted earnings which are considered to be indefinitely invested in non−U.S.subsidiaries.

Cash payments for income taxes were $35 million, $197 million (including a $130 million payment related to the company’s settlement with the IRS relating toCOLI) and $149 million (including a $62 million payment related to the company’s settlement with the IRS for COLI) in 2003, 2002 and 2001, respectively.

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Table of ContentsR.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 11. Debt Financing and Interest Expense

The company’s debt consisted of the following:

December 31

2003 2002

In ThousandsCommercial paper $ 90,537 $ 20,999Medium−term notes due 2005 at a weighted average interest rate of 6.66% 165,745 165,6415.0% debentures due November 15, 2006* 232,238 233,8728.875% debentures due April 15, 2021 80,842 80,8356.625% debentures due April 15, 2029 199,038 199,0008.820% debentures due April 15, 2031 68,919 68,9157.0% notes due January 1, 2003 — 110,000Other 91,051 119,390

Total $ 928,370 $ 998,652

* Includes an $8 million and a $10 million increase in debt related to the fair market value of interest rate swaps in 2003 and 2002, respectively. See Note14, Financial Instruments, for additional information.

Based upon the interest rates available to the company for borrowings with similar terms and maturities, the fair value of the company’s debt exceeded its bookvalue at December 31, 2003, by approximately $96 million.

At December 31, 2003, the Company had available two revolving credit facilities with a number of banks totaling $350 million. These facilities provide supportfor issuing commercial paper and other credit needs. The facilities consist of a short−term facility that matures in October 2004 and provides for borrowings ofup to $175 million and a long−term facility that matures in October 2007 and also provides for borrowings of up to $175 million. The company pays an annualcommitment fee on the total unused portion of the credit facilities of 0.07% for the short−term facility and 0.09% for the long−term facility. The facilities bearinterest at variable rates based on the current LIBOR rate and the company’s credit rating. As of December 31, 2003, there were no borrowings under these creditfacilities. Management believes that cash flow and borrowing capability are sufficient to fund operations and planned capital expenditures of the company for theforseeable future. See related discussion in Note 21, Subsequent Events.

The company also has $205 million in credit facilities at its non−U.S. units, most of which are uncommitted. As of December 31, 2003, total borrowings underthese facilities were $74 million.

As of December 31, 2003, $500 million of debt securities were available for issuance by the company under effective Form S−3 registration statements filed bythe company with the Securities and Exchange Commission.

The weighted average interest rate on all commercial paper during 2003 was 1.19% (1.73% at December 31, 2002). Annual maturities of debt are as follows:2004: $176 million, 2005: $167 million, 2006: $233 million, 2007: $1 million, 2008: $1 million, and $350 million thereafter.

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Table of ContentsR.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes interest expense included in the consolidated statements of income:

2003 2002 2001

In ThousandsInterest incurred $53,479 $68,118 $74,253Amount capitalized as property, plant and equipment (3,120) (5,300) (3,070)

Total $50,359 $62,818 $71,183

Interest paid, net of capitalized interest, was $66 million, $72 million and $71 million in 2003, 2002 and 2001, respectively. 2003 and 2002 both exclude interestreceived of $10 million related to interest rate swap agreements. See Note 14, Financial Instruments, to the consolidated financial statements for furtherinformation.

Note 12. Guarantees

The company has unconditionally guaranteed the repayment of certain loans and related interest and fees for certain of its consolidated subsidiaries. Theguarantees continue until the loans, including accrued interest and fees, have been paid in full. The maximum amount of the guarantees may vary, but is limitedto the sum of the total due and unpaid principal amounts plus related interest and fees. Additionally, the maximum amount of the guarantees, certain of which aredenominated in foreign currencies, will vary based on fluctuations in foreign exchange rates. As of December 31, 2003, the maximum principal amountguaranteed was approximately $184 million.

The company may recover a portion of its maximum liability upon liquidation of a subsidiary’s assets. The proceeds from such liquidation cannot be accuratelyestimated due to the multitude of factors that would affect the valuation and realization of such proceeds of a liquidation.

Note 13. Earnings per Share

In accordance with SFAS No. 128, Earnings per Share, the company has computed basic and diluted earnings per share (EPS), using the treasury stock method.

2003 2002 2001

In Thousands, except per−share dataAverage shares outstanding 113,285 113,060 116,728Effect of dilutive securities—options and nonvested restricted shares 1,017 1,312 1,770

Average shares outstanding, adjusted for dilutive effects 114,302 114,372 118,498

Net income $ 176,509 $ 142,237 $ 24,988Basic EPS $ 1.56 $ 1.26 $ 0.21Diluted EPS 1.54 1.24 0.21

Options outstanding to purchase 11 million, 11 million and 9 million shares of common stock at December 31, 2003, 2002 and 2001, respectively, were notincluded in the computation of diluted EPS because the exercise prices of the options were greater than the average market prices of the company’s commonshares during the year. The range of exercise prices for these options was between $23.85 and $46.88, $26.55 and $46.88 and $29.78 and $46.88 at December 31,2003, 2002 and 2001, respectively. The number of common shares outstanding as of December 31, 2003 and 2002 were 114 million and 113 million,respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 14. Financial Instruments

The company has limited transactions that fall under the accounting rules of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, asamended by SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities−Deferral of the Effective Date of FASB Statement No. 133, SFASNo. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, and SFAS No. 149, Amendment of Statement 133 on DerivativeInstruments and Hedging Activities. From time to time, the company uses financial instruments, including interest rate swap agreements and forward exchangeand option contracts, to manage exposure to movements in interest rates and exchange rates.

On November 14, 2001, the company issued $225 million in notes bearing interest at a fixed rate of 5.0% per annum and maturing on November 15, 2006. Inconjunction with this issuance the company entered into a series of pay−floating and pay−fixed swaps. Pay−floating swaps effectively convert fixed−rateobligations to variable−rate instruments indexed to LIBOR. Pay−fixed swaps effectively convert floating−rate obligations to fixed−rate instruments.

The following table summarizes the company’s interest rate swaps at December 31, 2003:

Thousands of dollars

Maturity Date

Notional

Principal(1)

Interest Rates

Fair

ValuesEffective Date Receive Pay

November 14, 2001 November 15, 2006 $ 100,000(4) 5.0% LIBOR + 0.863% $3,965(2)November 14, 2001 November 15, 2006 100,000(4) 5.0% LIBOR + 0.863% 3,965(2)November 17, 2003 May 17, 2004 100,000(5) LIBOR 1.590% (161)(3)November 17, 2003 May 17, 2004 100,000(5) LIBOR 1.538% (134)(3)

(1) The notional principal is the amount used for the calculation of interest payments that are exchanged over the life of the swap transaction and is equal tothe amount of dollar principal exchanged at maturity, if applicable.

(2) Swap is considered a fair value hedge. Accordingly, the fair value is recorded in Other noncurrent assets with offsets recorded in Long−term debt.(3) Swap does not qualify for hedge accounting. Accordingly, the change in the fair value of this agreement was recorded in Interest expense with offsets

recorded in Other accrued liabilities.(4) Receive fixed−pay floating interest rate swap.(5) Receive floating−pay fixed interest rate swap.

The net effect of the various interest rate swaps was a reduction in interest expense of $5 million and $4 million for the years ended December 31, 2003 and2002, respectively.

Note 15. Stock and Incentive Programs for Employees

Restricted Stock Awards—At December 31, 2003 and 2002, respectively, the company had approximately 364,000 and 337,000 unvested restricted shares of itscommon stock granted to certain officers. These shares are registered in the names of the recipients, but are subject to conditions of forfeiture and restrictions onsale or transfer for one to five years from the grant date. Dividends on the restricted shares are paid currently to the recipients. The expense of the grant isdetermined based on the market prices at the date of the grant and is recognized evenly over the vesting period.

During 2003, 2002 and 2001, respectively, a total of 126,000, 79,600 and 51,000 shares of restricted stock were issued with a grant date fair value of $3 million,$2 million and $3 million, respectively. Charges to expense for these grants were $3 million, $2 million and $3 million in 2003, 2002, and 2001, respectively.

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Table of ContentsR.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Incentive Compensation Plans—In 2001, the company implemented a new senior management annual incentive cash plan and a long−term incentive awardprogram designed to encourage and reward sustained value creation together with achievement of annual objectives and employee retention. Payments under theannual plan are based on the achievement of Economic Value Added (EVA) improvement targets, along with earnings per share objectives and other individualand strategic targets. Long−term awards made to senior officers during 2001 and 2003, respectively, are measured based on total shareholder return relative tothe performance of the S&P 500 over a three year period ending December 2003 and December 2005, respectively. Long−term awards are subject to thediscretion of the committee of the board of directors administering such awards to reduce the actual calculated amount of any award payment. The long−termawards are denominated in stock units and participants receive dividend equivalents during the performance period. Awards ultimately may be paid in stock, cashor a combination of stock and cash. The company’s incentive compensation plans for other officers, managers and supervisors are based primarily on annualimprovements in EVA, along with earnings per share and other individual and strategic targets.

A total of 10,484 stock units as dividend equivalents on the original 2001 long−term awards were added during the year ended December 31, 2003. At December31, 2003, a total of 247,804 stock units were accrued at target for the 2001 to 2003 performance period. As authorized by the committee of the board of directorsadministering the awards, executives were paid the value of their original awards plus accrued dividends for the 2001 to 2003 performance period at 162% oftarget and at a share price at the date of finalization of the awards.

Additionally, for the 2003 to 2005 performance period for continuing executives, a total of 274,906 long−term stock unit awards, including 11,133 as dividendequivalents on the original awards, was accrued at target during 2003.

Compensation expense for all long−term awards was $6 million, $4 million and $6 million during 2003, 2002 and 2001, respectively.

Stock Unit Award—In connection with the execution of an employment agreement, the Chief Executive Officer of the company was granted an award of 115,385stock units during 2001. During 2002 and 2003, an additional 4,444 and 5,337 stock units, respectively, were added as dividend equivalents earned on theoriginal grant. The award vests over three years and is payable in shares of the company’s stock upon the executive’s retirement, death or permanent and totaldisability. The award has been recorded at market value on the grant date as unearned compensation, and expense is recognized over the vesting period. Theinitial value of the award is amortized over the vesting period, net of forfeiture.

The value of the stock unit award was $4 million based upon the closing price of the company stock at December 31, 2003. The grant date fair value of the awardwas $3 million and compensation expense during 2003, 2002 and 2001 was $1.4 million, $1.4 million and $0.3 million, respectively.

Stock Options—The company has stock incentive plans for its employees. Under these plans, options vest from one to nine and one−half years after date of grantand may be exercised, once vested, up to 10 years from the date of grant. A maximum of 8 million shares were available for future grants of stock options, stockunits and restricted stock awards as of December 31, 2003.

The fair value of each option granted during the year is estimated on the date of grant using the Black−Scholes option−pricing model with the following range ofassumptions:

2003 2002 2001

Dividend yield 4.30 % 3.71% 3.39%Expected volatility 26.41 % 26.14% 27.03%Risk−free interest rate 4.25 % 4.59% 4.98%Expected life 10 years 10 years 10 years

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Table of ContentsR.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

A summary of the status of the company’s option activity is presented below:

2003 2002 2001

Shares

(Thousands)

WeightedAverageExercise

Price

Shares

(Thousands)

WeightedAverageExercise

Price

Shares

(Thousands)

WeightedAverageExercise

Price

Options outstanding at beginning of year 16,866 $ 29.69 16,679 $ 29.42 18,032 $ 30.13Options granted 3,432 18.94 1,919 30.72 1,835 25.81Options exercised (560) 21.60 (448) 21.91 (816) 21.66Options forfeited (1,362) 28.93 (1,284) 28.93 (2,372) 34.66

Options outstanding at end of year 18,376 $ 27.98 16,866 $ 29.69 16,679 $ 29.42

Options exercisable at end of year 11,841 $ 31.11 10,713 $ 31.74 9,546 $ 32.57

Weighted average fair value of options grantedduring the year $ 3.97 $ 7.44 $ 7.05

The following summarizes information about stock options outstanding at December 31, 2003:

Options Outstanding Options Exercisable

Range of Exercise Prices

Shares

(Thousands)

AverageRemainingContractual

Life (Years)

WeightedAverageExercise

Price

Shares

(Thousands)

WeightedAverageExercise

Price

$17.90–$24.88 7,371 7.58 $ 20.18 2,726 $ 21.26$25.41–$30.13 3,175 4.18 27.76 2,483 28.25$30.19–$38.06 6,196 4.40 33.45 4,998 34.06$39.00–$46.88 1,634 3.87 42.84 1,634 42.84

18,376 5.59 $ 27.98 11,841 $ 31.11

Other Information—Under the stock programs, authorized unissued shares or treasury shares may be used for issuance under the stock option programs. Thecompany intends to use reacquired shares of its common stock to meet the stock requirements of these programs in the future.

Note 16. Preferred Stock

The company has two million shares of $1.00 par value preferred stock authorized for issuance. The Board of Directors may divide the preferred stock into oneor more series and fix the redemption, dividend, voting, conversion, sinking fund, liquidation and other rights. The company has no present plans to issue anypreferred stock. One million of the shares are reserved for issuance under the Shareholder Rights Plan discussed in Note 17, Shareholder Rights Plan, below.

Note 17. Shareholder Rights Plan

The company maintains a Shareholder Rights Plan (the Plan) designed to deter coercive or unfair takeover tactics, to prevent a person or group from gainingcontrol of the company without offering fair value to all shareholders and to deter other abusive takeover tactics that are not in the best interest of shareholders.

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Table of ContentsR.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Under the terms of the Plan, each share of common stock is accompanied by one right; each right entitles the shareholder to purchase from the company oneone−thousandth of a newly issued share of Series A Junior Preferred Stock at an exercise price of $140.

The rights become exercisable 10 days after a public announcement that an acquiring person (as defined in the Plan) has acquired 15% or more of the outstandingcommon stock of the company (the Stock Acquisition Date), 10 business days after the commencement of a tender offer that would result in a person owning15% or more of such shares or 10 business days after an adverse person (as defined in the Plan) has acquired 10% or more of such shares and such ownershipinterest is likely to have a material adverse impact on the company. The company can redeem the rights for $0.01 per right at any time until 10 days following theStock Acquisition Date (under certain circumstances, the 10−day period can be shortened or lengthened by the company). The rights will expire on August 8,2006, unless redeemed earlier by the company.

If, subsequent to the rights becoming exercisable, the company is acquired in a merger or other business combination at any time when there is a 15% or moreholder, the rights will then entitle a holder (other than a 15% or more shareholder or an adverse person) to buy shares of the acquiring company with a marketvalue equal to twice the exercise price of each right. Alternatively, if a 15% holder acquires the company by means of a merger in which the company and itsstock survives, if any person acquires 15% or more of the company’s common stock or if an adverse person acquires 10% or more of the company’s commonstock and such ownership is likely to have a material adverse impact on the company, each right not owned by a 15% or more shareholder or an adverse personwould become exercisable for common stock of the company (or, in certain circumstances, other consideration) having a market value equal to twice the exerciseprice of the right.

The planned combination of the company with Moore Wallace will not cause the rights to become exercisable. See Note 3, Acquisitions and Investments, to theconsolidated financial statements.

Note 18. Industry Segment Information

The company operates primarily in the commercial print portion of the printing industry, with related service offerings designed to offer customers completesolutions for communicating their messages to target audiences.

Beginning January 1, 2003, the company revised its segment reporting to reflect the financial services business (Financial) as a separate segment. The company’sFinancial operations were previously reported within the Other segment. As a result of this change, the company now discloses three reportable segments: Print,Logistics and Financial.

The Print segment is comprised of the company’s businesses serving the following end markets within the commercial print industry: Magazines, Catalogs andRetail; Book; Telecommunications; and Premedia. The Print segment was created to optimize the company’s production capacity serving these end markets andto enhance service delivery capabilities. The formation of the Print segment in 2002 was intended to create a more cost−effective, integrated and flexible printplatform using a single business model and operating under one management team.

The Logistics segment represents the company’s logistics and distribution services operations for its print customers and other mailers. The Logistics segmentserves its customers by consolidating and delivering printed products and packages to the U.S. Postal Service closer to the final destination, resulting in reducedpostage costs and improved delivery performance.

The Financial segment serves the compliance and transactional documentation needs of the domestic and international capital markets, and provides customizedcommunications solutions to investment management, banking, managed care, and insurance clients to help manage and produce their stakeholdercommunications.

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Table of ContentsR.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The company has disclosed earnings (loss) from operations as the primary measure of segment earnings (loss). This is the measure of profitability used by thecompany’s chief operating decision−maker and is most consistent with the presentation of profitability reported within the consolidated financial statements. Theaccounting policies of the business segments reported are the same as those described in Note 1, Summary of Significant Accounting Policies, to the consolidatedfinancial statements.

Print Logistics Financial Other(1) Corporate(2)

Consolidated

Total

In Thousands2003Sales $ 2,956,408 $913,207 $426,231 $ 491,316 $ — $ 4,787,162Restructuring and impairment charges 2,782 3,736 2,815 6,749 345 16,427Earnings (loss) from operations 307,503 (10,871) 4,269 (38,492) 8,384 270,793Earnings (loss) from operations before income taxes 312,579 (11,158) 3,210 (38,997) (57,357) 208,277Assets 1,757,140 262,294 160,095 459,592 549,829 3,188,950Depreciation and amortization 225,364 8,718 21,668 30,164 43,445 329,359Capital expenditures 139,287 10,052 3,208 27,512 22,857 202,916

2002Sales $ 3,091,175 $784,024 $427,452 $ 452,286 $ — $ 4,754,937Restructuring and impairment charges 54,645 2,349 10,499 5,649 15,787 88,929Earnings (loss) from operations 304,318 11,100 (33,491) (27,443) (9,547) 244,937Earnings (loss) from operations before income taxes 315,593 11,049 (31,544) (33,104) (86,261) 175,733Assets 1,705,555 222,053 160,348 397,411 696,596 3,181,963Depreciation and amortization 233,423 6,298 27,393 28,248 57,010 352,372Capital expenditures 146,971 3,940 8,014 45,193 37,479 241,597

2001Sales $ 3,503,791 $775,518 $493,563 $ 524,888 $ — $ 5,297,760Restructuring and impairment charges 97,222 672 8,494 85,474 3,683 195,545Earnings (loss) from operations 268,167 (4,536) (33,049) (134,684) 51,373 147,271Earnings (loss) from operations before income taxes 283,636 (4,266) (32,200) (149,189) (23,087) 74,894Depreciation and amortization 261,520 15,358 30,224 42,493 29,128 378,723Capital expenditures 154,721 5,182 22,150 51,482 39,805 273,340

(1) Represents other operating segments of the company, including Direct Mail, International and Other.(2) Corporate earnings consist primarily of the following unallocated items: net earnings of benefit plans (excluding service costs) of $67 million, $85 million,

and $95 million in 2003, 2002, and 2001, respectively, which were partially offset by general corporate, management and information technology costs.

Corporate assets consist primarily of the following unallocated items at December 31, 2003: benefit plan assets of $319 million, investments in affordablehousing of $82 million and fixed assets of $73 million; and December 31, 2002: benefit plan assets of $336 million, investments in affordable housing of$105 million and fixed assets of $91 million.

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Table of ContentsR.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Earnings (loss) from operations is reconciled to earnings (loss) before income taxes as follows:

Print Logistics Financial Other (1) Corporate Consolidated

In Thousands2003Earnings (loss) from operations $307,503 $(10,871) $ 4,269 $ (38,492) $ 8,384 $ 270,793Net interest expense (465) (300) — (6,916) (42,678) (50,359)Other income (expense):Earnings (loss) from investments 102 — — 2,721 (77) 2,746Gains on sale of businesses and investments 4,078 — — — 1,448 5,526Foreign currency transaction gain (loss) 131 — 158 (251) (933) (895)Affordable housing write−downs — — — — (23,250) (23,250)Other income (expense), net 1,230 13 (1,217) 3,941 (251) 3,716

Total other income (expense) 5,541 13 (1,059) 6,411 (23,063) (12,157)

Earnings (loss) before income taxes $312,579 $(11,158) $ 3,210 $ (38,997) $(57,357) $ 208,277

2002Earnings (loss) from operations $304,318 $ 11,100 $(33,491) $ (27,443) $ (9,547) $ 244,937Net interest expense (312) (69) — (9,464) (52,973) (62,818)Other income (expense):Earnings (loss) from investments 3,621 — — 1,969 (3) 5,587Gains on sale of businesses and investments — — — — 6,350 6,350Foreign currency transaction gain (loss) (208) — 93 (2,698) (77) (2,890)Affordable housing write−downs — — — (26,000) (26,000)Other income (expense), net 8,174 18 1,854 4,532 (4,011) 10,567

Total other income (expense) 11,587 18 1,947 3,803 (23,741) (6,386)

Earnings (loss) before income taxes $315,593 $ 11,049 $(31,544) $ (33,104) $(86,261) $ 175,733

2001Earnings (loss) from operations $268,167 $ (4,536) $(33,049) $(134,684) $ 51,373 $ 147,271Net interest expense (428) (37) — (11,116) (59,602) (71,183)Other income (expense):Earnings (loss) from investments (1,690) — — 2,629 32 971Gains on sale of businesses and investments — — — 6,641 — 6,641Foreign currency transaction gain (loss) 12 — 80 (5,430) (18) (5,356)Affordable housing write−downs — — — — (8,400) (8,400)Other asset write−downs — — — (18,536) — (18,536)Other income (expense), net 17,575 307 769 11,307 (6,472) 23,486

Total other income (expense) 15,897 307 849 (3,389) (14,858) (1,194)

Earnings (loss) before income taxes $283,636 $ (4,266) $(32,200) $(149,189) $(23,087) $ 74,894

(1) Represents other operating segments of the company, including Direct Mail, International and Other.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table shows net sales by end market:

Net Sales 2003 % of Total 2002 % of Total 2001 % of Total

Dollars in ThousandsMagazines, Catalogs and Retail $ 1,543,075 32.2% $ 1,585,421 33.4% $ 1,876,555 35.4%Book 663,273 13.9 705,390 14.8 708,380 13.4Telecommunications 632,184 13.2 679,422 14.3 777,383 14.7Premedia 117,876 2.5 120,942 2.5 141,473 2.7

Print 2,956,408 61.8 3,091,175 65.0 3,503,791 66.2

Logistics 913,207 19.1 784,024 16.5 775,518 14.6Financial 426,231 8.9 427,453 9.0 493,563 9.3Direct Mail 112,360 2.3 138,776 2.9 179,330 3.4Other (1) 378,956 7.9 313,509 6.6 345,558 6.5

Total Other 491,316 10.2 452,285 9.5 524,888 9.9

Total $ 4,787,162 100.0% $ 4,754,937 100.0% $ 5,297,760 100.0%

(1) Represents other operating units of the company, including International and Other.

Note 19. Geographic Area Information

U.S. International Combined

In Thousands2003Net sales $ 4,204,205 $ 582,957 $ 4,787,162Long−lived assets(1) $ 1,744,366 $ 445,074 $ 2,189,4402002Net sales $ 4,255,664 $ 499,273 $ 4,754,937Long−lived assets(1) $ 1,795,209 $ 520,315 $ 2,315,524

(1) Includes net property, plant and equipment, goodwill and other intangibles, prepaid pension cost and other noncurrent assets.

Note 20. New Accounting Pronouncements

In December 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 132 (revised 2003), Employers’ Disclosures about Pensions and OtherPostretirement Benefits, an amendment of FASB Statements No. 87, 88 and 106, and a revision of FASB Statement No. 132. This standard revises employers’disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by FASBStatements No. 87, Employers’ Accounting for Pensions, No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans andfor Termination Benefits, and No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions. The new rules require additional disclosuresabout the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. The requiredinformation should be provided separately for pension plans and for other postretirement benefit plans. The new disclosures are generally effective for 2003calendar year−end financial statements of public companies, with a delayed effective date for certain disclosures and for foreign plans. See Note 9, RetirementPlans, to the consolidated financial statements for the related

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

disclosures required under this statement. Adoption of this statement had no impact on the company’s financial position, results of operations or cash flows.

Effective January 1, 2003, the company adopted SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which rescinds EmergingIssues Task Force (EITF) Issue No. 94−3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (includingCertain Costs Incurred in a Restructuring). SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they areincurred, rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by this statement include lease termination costs andcertain employee severance costs that are associated with a restructuring, discontinued operation, plant closing or other exit or disposal activity. Adoption of thisstatement had no material impact on the company’s financial position, results of operations or cash flows.

As of January 1, 2003, the company adopted the disclosure requirement of SFAS No. 148, Accounting for Stock−Based Compensation—Transition andDisclosure. This statement amends SFAS No. 123, Accounting for Stock−Based Compensation, to provide alternative methods of transition for a voluntarychange to the fair value based method of accounting for stock−based employee compensation. In addition, this statement amends the disclosure requirements ofSFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock−based employeecompensation and the effect of the method used on reported results. As of December 31, 2003, the company has elected not to change to the fair value−basedmethod of accounting for stock−based employee compensation. The company continues to account for employee stock options under APB No. 25, Accountingfor Stock Issued to Employees, under which the company did not recognize any compensation expense for 2003 or 2002. See Note 15, Stock and IncentivePrograms for Employees, to the consolidated financial statements for the related disclosures required under SFAS No. 148.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 was issued inorder to address some of the implementation issues about interpreting and applying the definition of a derivative, in particular, interpreting the meaning of (1) thephrase an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changesin market factors and (2) the term underlying, as well as issues about how to discern the characteristics of a derivative that contains a financing component;incorporate some of the conclusions reached as part of the Derivatives Implementation Group (DIG) process that ultimately made it necessary to amend SFASNo. 133; and align SFAS No. 133 with the decisions that the FASB has reached in other FASB projects dealing with financial instruments. This statement iseffective for contracts entered into or modified after June 30, 2003, and is effective for hedging relationships designated after June 30, 2003, except for certaintransition and effective dates relating to other amendments that principally resulted from the DIG process. Adoption of this standard had no impact on thecompany’s financial position, results of operations or cash flows.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, which requirescertain financial instruments that were previously presented on the consolidated balance sheets as equity to be presented as liabilities. Such instruments includemandatorily redeemable financial instruments and certain options and warrants. SFAS No. 150 is effective for financial instruments entered into or modified afterMay 31, 2003, and otherwise was effective for the company as of July 1, 2003. Adoption of this standard had no impact on the company’s financial position,results of operations or cash flows.

Effective July 1, 2003, the company adopted Emerging Issues Task Force (EITF) Issue No. 00−21, Accounting For Revenue Arrangements with MultipleDeliverables, which establishes criteria for whether revenue on a deliverable can be recognized separately from other deliverables in a multiple deliverable

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Table of ContentsR.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

arrangement. The criteria considers whether the delivered item has stand−alone value to the customer, whether the fair value of the delivered item can be reliablydetermined and the customer’s right of return for the delivered item. Adoption of this standard had no material impact on the company’s financial position,results of operations or cash flows.

In May 2003, the FASB issued EITF Issue No. 01−8, Determining Whether an Arrangement Contains a Lease, which requires capital lease treatment forarrangements containing an embedded lease, thereby conveying the right to control the use of property, plant or equipment (collectively, “property”) whether theright to control the use of the property is explicitly or implicitly specified. The right is conveyed if the purchaser (lessee) obtains physical or operational controlof the underlying property or takes substantially all of its output. This pronouncement applies prospectively to new or modified arrangements beginning afterMay 28, 2003. Adoption of this standard had no impact on the company’s financial position, results of operations or cash flows.

In November 2002, the FASB issued Interpretation No. 45 (FIN 45), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others. The Interpretation elaborates on the existing disclosure requirements for most guarantees, including loan guarantees suchas standby letters of credit. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, ormarket value, of the obligations it assumes under the guarantee and must disclose that information in its interim and annual financial statements. The initialrecognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. Adoption of this standard hadno material impact on the company’s financial position, results of operations or cash flows.

In January 2003 and December 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), and its revision, FIN 46−R,respectively. FIN 46 and FIN 46−R address the consolidation of entities whose equity holders have either not provided sufficient equity at risk to allow the entityto finance its own activities or do not possess certain characteristics of a controlling financial interest. FIN 46 and FIN 46−R require the consolidation of theseentities, known as variable interest entities (VIEs), by the primary beneficiary of the entity. The primary beneficiary is the entity, if any, that is subject to amajority of the risk of loss from the VIE’s activities, entitled to receive a majority of the VIE’s residual returns, or both. FIN 46 and FIN 46−R are applicable forfinancial statements of public entities that have interests in VIEs or potential VIEs referred to as special−purpose entities for periods ending after December 15,2003. Application by public entities for all other types of entities is required in financial statements for periods ending after March 15, 2004. The company’sinvestment in affordable housing and other investments fall into this latter category. The company’s risk of loss related to its equity investments, includinginvestments in affordable housing entities, is generally limited to the carrying value of these investments, which was approximately $105 million at December31, 2003. The company is continuing to evaluate its investments to determine which, if any, will be impacted by the adoption of FIN 46 and FIN 46−R. Adoptionof both of these standards is not expected to have a material impact on the company’s financial position, results of operations or cash flows.

On December 17, 2003, the Staff of the Securities and Exchange Commission (SEC or the Staff) issued Staff Accounting Bulletin No. 104 (SAB 104), RevenueRecognition, which amends SAB 101, Revenue Recognition in Financial Statements. SAB 104’s primary purpose is to rescind accounting guidance contained inSAB 101 related to multiple element revenue arrangements, superseded as a result of the issuance of EITF 00−21. Additionally, SAB 104 rescinds the SEC’sRevenue Recognition in Financial Statements Frequently Asked Questions and Answers (the FAQ) issued with SAB 101 that had been codified in SEC Topic 13,Revenue Recognition. Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 has changed to reflect the issuance ofEITF 00−21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. Adoption of this standard had no impact onthe company’s financial position, results of operations or cash flows.

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Table of ContentsR.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

On December 8, 2003, President Bush signed into law a bill that expands Medicare, primarily adding a prescription drug benefit for Medicare−eligible retireesstarting in 2006. Under this bill, postretirement plans with prescription drug benefits that are at least “actuarially equivalent” to the Medicare Part D benefit willbe eligible for a 28% subsidy. In response to this bill, on January 12, 2004, the FASB issued FASB Staff Position (FSP) 106−1, Accounting and DisclosureRequirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. FSP 106−1 addresses how to incorporate this subsidyinto the calculation of the accumulated periodic benefit obligation (APBO) and net periodic postretirement benefit costs, and also allows plan sponsors to deferrecognizing the effects of the bill in the accounting for its post−retirement plan under SFAS No. 106, Employers’ Accounting for Postretirement Benefits OtherThan Pensions, until further authoritative guidance on the accounting for the federal subsidy is issued. As the measurement date for the company’s postretirementbenefit plan is September 30, 2003, the APBO and the net periodic postretirement benefit cost in the financial statements and accompanying notes do not reflectthe effects of the bill on the plan. In addition, specific authoritative guidance on the accounting for the federal subsidy is pending, and when issued, could requirea change to previously reported information. The company has deferred adoption of this standard, as is allowed under FSP 106−1, until further guidance isissued.

Note 21. Subsequent Events

In connection with the anticipated combination with Moore Wallace (see Note 3, Acquisitions and Investments), the company expects to issue additionallong−term debt, the proceeds of which may be used to retire a portion of Moore Wallace’s existing debt, repay outstanding commercial paper, pay debtrepayment or swap termination costs and fees, or provide funds for other general corporate purposes. On February 11, 2004, the company entered into twoseparate treasury rate−lock transactions totaling $400 million with two financial institutions in order to effectively lock in a portion of the interest rate on aportion of the expected debt issue.

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Table of ContentsREPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders ofR.R. Donnelley & Sons Company:Chicago, Illinois

We have audited the accompanying consolidated balance sheets of R.R. Donnelley & Sons Company as of December 31, 2003 and 2002, and the relatedconsolidated statements of income, shareholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated financial statements ofR.R. Donnelley & Sons Company as of December 31, 2001, and for the year then ended were audited by other auditors who have ceased operations. Thoseauditors expressed an unqualified opinion on those financial statements in their report dated January 23, 2002.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for ouropinion.

In our opinion, such 2003 and 2002 consolidated financial statements present fairly, in all material respects, the financial position of the Company at December31, 2003 and 2002, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in theUnited States of America.

As discussed above, the consolidated financial statements of R.R. Donnelley & Sons Company as of December 31, 2001, and for the year then ended wereaudited by other auditors who have ceased operations. As described in Note 18, the Company changed the composition of its reportable segments in 2002 and2003, and the amounts in the 2001 financial statements relating to reportable segments have been restated to conform to the 2003 composition of reportablesegments. We audited the adjustments that were applied to restate the disclosures for reportable segments reflected in the 2001 financial statements. Ourprocedures included (a) comparing the adjusted amounts of segment revenues, operating income and assets to the Company’s underlying records obtained frommanagement, and (b) testing the mathematical accuracy of the reconciliations of segment amounts to the consolidated financial statements. In our opinion, suchadjustments are appropriate and have been properly applied. As described in Note 5, these financial statements include the transitional disclosures required byStatement of Financial Accounting Standards (Statement) No. 142, Goodwill and Other Intangible Assets, which was adopted by the Company as of January 1,2002. Our audit procedures with respect to the disclosures in Note 5 with respect to 2001 included (i) comparing the previously reported net income to thepreviously issued financial statements and the adjustments to reported net income representing amortization expense (including any related tax effects)recognized in those periods related to goodwill to the Company’s underlying records obtained from management, and (ii) testing the mathematical accuracy ofthe reconciliation of adjusted net income to reported net income and the related earnings−per−share amounts. In our opinion, the disclosures for 2001 in Note 5are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 consolidated financial statements of the Company otherthan with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 consolidated financial statementstaken as a whole.

DELOITTE & TOUCHE LLPChicago, IllinoisFebruary 18, 2004

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Table of ContentsPREDECESSOR AUDITOR (ARTHUR ANDERSEN LLP) OPINION

The following report is a copy of a report previously issued by Arthur Andersen LLP and has not been reissued by Arthur Andersen LLP.

We have audited the accompanying consolidated balance sheets of R.R. Donnelley & Sons Company (a Delaware corporation) and Subsidiaries as of December31, 2001 and 2000, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period endedDecember 31, 2001. These financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for ouropinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of R.R. Donnelley & Sons Company andSubsidiaries as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31,2001, in conformity with accounting principles generally accepted in the United States.

ARTHUR ANDERSEN LLP

Chicago, IllinoisJanuary 23, 2002

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Table of ContentsUNAUDITED INTERIM FINANCIAL INFORMATION, DIVIDEND

SUMMARY AND FINANCIAL SUMMARY

Year Ended December 31

First

Quarter

Second

Quarter

Third

Quarter

Fourth

Quarter Full Year

Dollars in Thousands, except per−share data2003Net sales $ 1,073,817 $ 1,142,462 $ 1,193,774 $ 1,377,110 $ 4,787,162Gross profit 168,310 188,391 222,891 256,094 835,686Net income* 5,702 19,392 53,730 97,684 176,509Net income per diluted share* 0.05 0.17 0.47 0.85 1.54Stock price high 23.35 26.47 27.59 30.15 30.15Stock price low 16.94 18.17 23.06 24.75 16.94Stock price closing price 18.32 26.14 24.87 30.15 30.15

2002Net sales $ 1,093,650 $ 1,148,892 $ 1,177,280 $ 1,335,115 $ 4,754,937Gross profit 167,905 194,253 242,179 263,232 867,569Net income* 22,659 23,777 47,742 48,059 142,237Net income per diluted share* 0.20 0.21 0.42 0.42 1.24Stock price high 31.35 32.10 28.40 23.55 32.10Stock price low 27.50 25.76 22.63 18.50 18.50Stock price closing price 31.10 27.55 23.51 21.77 21.77

Stock prices reflect New York Stock Exchange composite quotes.

Dividend Summary

2003 2002 2001 2000 1999

Quarterly rate per common share** $0.255 $0.245 $0.235 $0.225 $0.215Yearly rate per common share 1.02 0.98 0.94 0.90 0.86

*Includes the following significant items:

• For 2003: First quarter restructuring and impairment charges of $3 million ($2 million after−tax, or $0.01 per diluted share); second quarterrestructuring and impairment charges of $5 million ($3 million after−tax, or $0.03 per diluted share); third quarter restructuring and impairmentcharges of $2 million ($1 million after−tax, or $0.01 per diluted share); and fourth quarter restructuring and impairment charges of $7 million ($7after−tax, or $0.06 per diluted share) and a tax benefit of $46 million ($46 million after−tax, or $0.40 per diluted share).

• For 2002: First quarter restructuring and impairment charges of $27 million ($17 million after−tax, or $0.14 per diluted share); second quarterrestructuring and impairment charges of $16 million ($10 million after−tax, or $0.08 per diluted share); third quarter restructuring and impairmentcharges of $23 million ($13 million after−tax, or $0.12 per diluted share); fourth quarter restructuring and impairment charges of $23 million ($14million after−tax, or $0.13 per diluted share); first quarter tax benefit from the settlement with the IRS on COLI of $30 million ($30 million after−tax,or $0.26 per diluted share); and second quarter gain on sale of businesses and investments of $6 million ($6 million after−tax, or $0.06 per dilutedshare).

**Averages (2003: $0.25 first two quarters and $0.26 last two quarters; 2002: $0.24 first two quarters and $0.25 last two quarters; 2001: $0.23 first twoquarters and $0.24 last two quarters; 2000: $0.22 first two quarters and $0.23 last two quarters; and 1999: $0.21 first two quarters and $0.22 last twoquarters).

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Table of ContentsUNAUDITED INTERIM FINANCIAL INFORMATION, DIVIDEND

SUMMARY AND FINANCIAL SUMMARY—(Continued)

Financial Summary

2003 2002 2001 2000 1999

Dollars in Thousands, except per−share dataNet sales $ 4,787,162 $ 4,754,937 $ 5,297,760 $ 5,764,335 $5,415,642Income from continuing operations* 176,509 142,237 24,988 266,900 311,515Loss from discontinued operations — — — — (3,201)Net income* 176,509 142,237 24,988 266,900 308,314Per diluted common share* 1.54 1.24 0.21 2.17 2.38Total assets 3,188,950 3,181,963 3,385,617 3,914,202 3,853,464Noncurrent liabilities 1,322,216 1,312,639 1,512,920 1,491,093 1,511,743

* Includes the following significant items affecting comparability:

• For 2003: restructuring and impairment charges of $16 million ($13 million after−tax, or $0.12 per diluted share), gain on sale ofinvestments of $6 million ($4 million after−tax, or $0.04 per diluted share) and a tax benefit of $46 million ($46 million after−tax, or $0.40per diluted share, see Note 10, Income Taxes, to the consolidated financial statements)

• For 2002: restructuring and impairment charges of $89 million ($54 million after−tax, or $0.47 per diluted share), a tax benefit from thesettlement with the IRS on reserves of $30 million ($30 million after−tax, or $0.26 per diluted share) and gain on sale of businesses andinvestments of $6 million ($6 million after−tax, or $0.06 per diluted share);

• For 2001: restructuring and impairment charges of $196 million ($137 million after−tax, or $1.15 per diluted share), gain on sale ofbusinesses and investments of $7 million ($7 million after−tax, or $0.05 per diluted share) and loss on investment write−downs of $19million ($19 million after−tax, or $0.16 per diluted share);

• For 2000: gain on sale of shares received from the demutualization of the company’s basic life insurance carrier of $13 million ($8 millionafter−tax, or $0.06 per diluted share); and

• For 1999: gain on sale of businesses and investments of $43 million ($27 million after−tax, or $0.20 per diluted share).

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Table of ContentsF−41

REPORT OF INDEPENDENT AUDITORS ONFINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Shareholders ofR.R. Donnelley & Sons Company

We have audited the consolidated financial statements of R.R. Donnelley & Sons Company and subsidiaries (the “Company”) as of December 31, 2003 and 2002and for the years then ended, and have issued our report thereon dated February 18, 2004 (which expressed an unqualified opinion and included an explanatoryparagraph as to the Company’s changes in the composition of its reportable segments in 2002 and 2003 and the Company’s change in its accounting for goodwilland intangible assets in 2002 and our audit of the transitional adjustments related to these changes reflected in the 2001 financial statements); such consolidatedfinancial statements and report are included in your 2003 Annual Report to Shareholders included in this Form 10−K. The consolidated financial statements ofthe Company as of December 31, 2001 was audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on thoseconsolidated financial statements in their report dated January 23, 2002.

Our audits also included the financial statement schedule of the Company as it relates to the years ended December 31, 2003 and 2002 of the Company, listed inItem 15. The financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits. Inour opinion, such financial statement schedule, as it relates to the years ended December 31, 2003 and 2002, when considered in relation to the basic financialstatements taken as a whole, presents fairly in all material respects the information set forth therein. The financial statement schedule, as it relates to the yearended December 31, 2001, was subjected to auditing procedures by other auditors whose report dated January 23, 2002 stated that such information is fairlystated in all material respects when considered in relation to the basic 2001 financial statements taken as a whole.

DELOITTE & TOUCHE LLP

Chicago, IllinoisFebruary 18, 2004

REPORT OF PREDECESSOR AUDITORS (ARTHUR ANDERSEN LLP) ONFINANCIAL STATEMENT SCHEDULE

The following report is a copy of a report previously issued by Arthur Andersen LLP and has not been reissued by Arthur Andersen LLP. This report applies toSupplemental Schedule II—Valuation and Qualifying Accounts for the years ended December 31, 2000 and 2001.

To the Shareholders ofR.R. Donnelley & Sons Company:

We have audited, in accordance with generally accepted auditing standards, the financial statements included in the R.R. Donnelley & Sons Company AnnualReport to Shareholders included in this Form 10−K, and have issued our report thereon dated January 23, 2002. Our audit was made for the purpose of formingan opinion of those statements taken as a whole. The schedule listed in the index to the financial statements is the responsibility of the Company’s managementand is presented for purposes of complying with the Securities and Exchange Commission’s rules and is not part of the basic financial statements. This schedulehas been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects thefinancial data required to be set forth therein in relation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Chicago, IllinoisJanuary 23, 2002

Table of ContentsFINANCIAL STATEMENT SCHEDULE II

Valuation and Qualifying Accounts

Transactions affecting the allowances for doubtful accounts during the years ended December 31, 2003, 2002 and 2001, were as follows:

2003 2002 2001

Thousands of dollarsAllowance for trade receivable losses:Balance, beginning of year $ 19,250 $ 22,571 $ 20,016Provisions charged to income 22,827 15,100 26,083

42,077 37,671 46,099Uncollectible accounts written off, net of recoveries (15,761) (18,421) (23,528)

Balance, end of year $ 26,316 $ 19,250 $ 22,571

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Table of ContentsINDEX TO EXHIBITS*

Description Exhibit No.

Combination Agreement, dated as of November 8, 2003, between R.R. Donnelley & Sons Company and Moore Wallace Incorporated(1) 2(a)

First Amendment to Combination Agreement, dated as of February 19, 2004, betweenR.R. Donnelley & Sons Company and Moore Wallace Incorporated(2) 2(b)

Restated Certificate of Incorporation(3) 3(i)

By−Laws(4) 3(ii)(a)

Form of Rights Agreement, dated as of April 25, 1996 between R.R. Donnelley & Sons Company and First Chicago Trust Company of NewYork(5) 4(a)

Instruments Defining the Rights of Security Holders(6) 4(b)

Indenture dated as of November 1, 1990 between the Company and Citibank, N.A. as Trustee(7) 4(c)

Five−Year Credit Agreement dated October 10, 2002 among R.R. Donnelley & Sons Company, the Banks named therein and Bank One, N.A.,as Administrative Agent(8) 4(d)

364−Day Credit Agreement dated October 9, 2003 among R.R. Donnelley & Sons Company, the Banks named therein and Bank One, N.A., asAdministrative Agent(9) 4(e)

Policy on Retirement Benefits, Phantom Stock Grants and Stock Options for Directors(10)** 10(a)

Directors’ Deferred Compensation Agreement, as amended(11)** 10(b)

Donnelley Shares Stock Option Plan, as amended(12)** 10(c)

Form of 2003 Senior Management Long Term Incentive Award** 10(d)

Form of severance agreement for Senior Officers, as amended(13)** 10(e)

Non−Qualified Deferred Compensation Plan(14)** 10(f)

1995 Stock Incentive Plan, as amended(11)** 10(g)

2000 Stock Incentive Plan, as amended(9)** 10(h)

2000 Broad−based Stock Incentive Plan, as amended(9)** 10(i)

Amended and Restated R.R. Donnelley & Sons Company Unfunded Supplemental Benefit Plan, as amended(15)** 10(j)

Employment Agreement between R.R. Donnelley & Sons Company and William L. Davis(16)** 10(k)

Premium−Priced Option Agreement between R.R. Donnelley & Sons Company and William L. Davis(17)** 10(l)

Agreement between R.R. Donnelley & Sons Company and Joseph C. Lawler(16)** 10(m)

Separation and Release Agreement between R.R. Donnelley & Sons Company and Michael Portland** 10(n)

Agreement between R.R. Donnelley & Sons Company and Michael Allen** 10(o)

Computation of Ratio of Earnings to Fixed Charges 12

R.R. Donnelley & Sons Company Code of Ethics for the Chief Executive Officer and Senior Financial Officers 14

Subsidiaries of R.R. Donnelley & Sons Company 21

Independent Auditors’ Consent dated February 18, 2004 23

Powers of Attorney 24

E−1

Table of Contents

Table of Contents

Certification by William L. Davis, Chief Executive Officer, required by Rule 13a−14(a) or Rule 15d−14(a) of the Securities Exchange Act of 193431.1

Certification by Gregory A. Stoklosa, Chief Financial Officer, required by Rule 13a−14(a) or Rule 15d−14(a) of the Securities Exchange Act of 193431.2

Certification by William L. Davis, Chief Executive Officer, required by Rule 13a−14(b) or Rule 15d−14(b) of the Securities Exchange Act of 1934and Section 1350 of Chapter 63 of Title 18 of the United States Code 32.1

Certification by Gregory A. Stoklosa, Chief Financial Officer, required by Rule 13a−14(b) or Rule 15d−14(b) of the Securities Exchange Act of 1934and Section 1350 of Chapter 63 of Title 18 of the United States Code 32.2

* Filed with the Securities and Exchange Commission. Each such exhibit may be obtained by a shareholder of the Company upon payment of $5.00 perexhibit.

** Management contract or compensatory plan or arrangement.

(1) Filed as Exhibit to Current Report on Form 8−K, filed on November 10, 2003, and incorporated herein by reference.

(2) Filed as Exhibit to Current Report on Form 8−K, filed on February 20, 2004, and incorporated herein by reference.

(3) Filed as Exhibit to Quarterly Report on Form 10−Q for the quarterly period ended March 31, 1996, filed on May 3, 1996, and incorporated hereinby reference.

(4) Filed as Exhibit to Form S−8, filed on May 3, 2002, and incorporated herein by reference.

(5) Filed as Exhibit to Form 8−A filed on June 5, 1996, and incorporated herein by reference.

(6) Instruments, other than that described in 4(c) and 4(d), defining the rights of holders of long−term debt not registered under the SecuritiesExchange Act of 1934 of the registrant and of all subsidiaries for which consolidated or unconsolidated financial statements are required to be filedare being omitted pursuant to paragraph (4)(iii)(A) of Item 601 of Regulation S−K. Registrant agrees to furnish a copy of any such instrument tothe Commission upon request.

(7) Filed as Exhibit with Form SE filed on March 26, 1992, and incorporated herein by reference.

(8) Filed as Exhibit to Quarterly Report on Form 10−Q for the quarterly period ended September 30, 2002, filed on November 13, 2002, andincorporated herein by reference.

(9) Filed as Exhibit to Quarterly Report on Form 10−Q for the quarterly period ended September 30, 2003, filed on November 12, 2003, andincorporated herein by reference.

(10) Filed as Exhibit to Annual Report on Form 10−K for the year ended December 31, 2000, filed on March 30, 2001, and incorporated herein byreference.

(11) Filed as Exhibit to Quarterly Report on Form 10−Q for the quarterly period ended September 30, 1998, filed on November 12, 1998, andincorporated herein by reference.

(12) Filed as Exhibit to Annual Report on Form 10−K for the year ended December 31, 1996, filed on March 10, 1997, and incorporated herein byreference.

(13) Filed as Exhibit to Annual Report on Form 10−K for the year ended December 31, 1999, filed on March 30, 2000, and incorporated herein byreference.

(14) Filed as Exhibit to Form S−8 filed February 27, 2002, and incorporated herein by reference.

(15) Filed as Exhibit to Quarterly Report on Form 10−Q for the quarterly period ended March 31, 2003, filed on May 14, 2003, and incorporated hereinby reference.

(16) Filed as Exhibit to Annual Report on Form 10−K for the year ended December 31, 2001, filed on February 22, 2002, and incorporated herein byreference.

(17) Filed as Exhibit to Quarterly Report on Form 10−Q for the quarterly period ended March 31, 1997, filed on May 7, 1997, and incorporated hereinby reference.

E−2

Exhibit 10(d)

R.R. DONNELLEY & SONS COMPANY2003 SENIOR MANAGEMENT LONG TERM INCENTIVE AWARD

1. Award. (a) To promote the growth and profitability of R.R. Donnelley & Sons Company, and its subsidiaries (the “Company”), and to provide incentives toachieve long term corporate objectives, all with a view towards enhancing shareholder value, this Long Term Incentive Award (“Award”) is granted as of this day of , 2003, by the Company to (“Participant”). This Award is made pursuant to the provisions of the R. R. Donnelley & SonsCompany 2000 Stock Incentive Plan (“2000 SIP”). Capitalized terms not defined herein shall have the meanings specified in the 2000 SIP.

(b) The Company hereby credits to Participant stock units (the “Original Award Amount”), subject to the restrictions and on the terms and conditions setforth herein. Participant shall indicate acceptance of this Award by signing and returning a copy hereof. These stock units represent percent ( %) ofyour 2003 base salary midpoint divided by the average of the closing price of one share of the Company’s common stock on the New York Stock Exchange(“NYSE”) for the last forty (40) trading days of 2002 multiplied by a factor of two (2).

2. Form of Award. This Award is made subject to the level of achievement of a Relative Total Shareholder Return (“RTSR”) goal as set forth in Exhibit Ahereto over a period of three fiscal years of the Company (a “Performance Period”), as determined by the Committee in its sole discretion. The PerformancePeriod shall begin January 1, 2003 and end December 31, 2005. Common stock shall not be issued at the time of this Award but the Award shall represent theright to receive stock and/or cash (as determined herein) if the RTSR goal set forth in Exhibit A hereto is achieved. Except as set forth in paragraph 5 of thisAward, no rights or interests of any kind shall be vested in Participant until the conclusion of the Performance Period and the determination of the level ofachievement specified in the Award. The Committee retains sole discretion to reduce the amount of or eliminate any payment otherwise payable to Participantwith respect to this Award to reflect any special circumstances the Committee deems significant. Subject to the terms and conditions of the 2000 SIP and thisAward, each stock unit is substantially the equivalent of a share of common stock.

3. Determination of Achievement; Distribution of Award. (a) As of the last day of the Performance Period, Participant may earn up to four (4) times theOriginal Award Amount depending upon the extent to which the RTSR goal is met or exceeded as of such date. The Committee shall make the determination asto whether the goal has been met. The Committee, at its first meeting following completion of the Performance Period, shall certify the achievement of the RTSRgoal and shall further certify the amount of the Award to be distributed as a result of such achievement.

(b) RTSR is defined as the sum of (i) appreciation in the common stock of the Company plus (ii) dividends declared on the common stock of the Company, ascompared to the total return for the S&P 500 Index for the same measurement period. Appreciation in the common stock of the Company for any PerformancePeriod shall be measured using the average closing price of one share of common stock on the NYSE during the last forty (40) trading

days of 2000 versus the last forty (40) trading days of the Performance Period. Should the Company’s RTSR at the end of the Performance Period be less thanthe 40th percentile of the S&P 500, then the RTSR goal shall not be deemed achieved. Should the Company’s RTSR at the end of the Performance Period beequal to the 50th percentile of the S&P 500, the RTSR Performance Factor shall be fully achieved at an Award level of 100%. Should the Company’s RTSR atthe end of the Performance Period be equal to the 75th percentile of the S&P 500, then the Award level hereunder shall be 200%, and should RTSR at the end ofthe Performance Period be at the 100th percentile of the S&P 500, then the Award level hereunder shall be 400%. For any Company RTSR between the 40th and100th percentiles, the Committee shall determine the percentage of achievement to be applied to the Award.

(c) Distribution of the Award shall be made as soon as practicable following the certification described in (a) above. Distribution of this Award may be made instock, cash or any combination thereof as determined by the Committee.

4. Dividends; Voting. (a) Dividends which are declared and payable during the Performance Period on a like number of shares of common stock as are equalto the Original Award Amount shall be credited to Participant as though reinvested in additional shares of common stock and shall be compounded for purposesof determining future dividend credits (which together shall be called “Dividend Equivalents”). Should the Company’s RTSR performance as calculated pursuantto the provisions of paragraph 3(b) above be less than the 50th percentile but greater than the 40th percentile, then the Committee shall determine the percentageof Dividend Equivalents to distribute in conjunction with distribution of the Award hereunder. In the event that the Company’s RTSR equals or exceeds the 50th

percentile, however, Participant shall receive the actual Dividend Equivalents credited during the term of this Award without regard to the level of RTSRachievement.

(b) Participant shall have no rights to vote shares of common stock represented by the Original Award Amount or the Dividend Equivalents which are thesubject of this Award unless and until distribution of the Award pursuant to paragraph 3(b) above.

5. Treatment upon Separation or Termination. (a) Death. Unless otherwise determined by the Committee, if Participant shall cease to be employed by theCompany at any time prior to December 31, 2005 by reason of death, the Company shall distribute to Participant=s executor, administrator, personalrepresentative or beneficiary Participant=s Award plus Dividend Equivalents which would have been earned during the Performance Period in which deathoccurred pro rated through the date of death, as estimated by the Committee. The foregoing distribution shall be made following the first Committee meetingheld following the date of death.

(b) Disability. Unless otherwise determined by the Committee, if Participant shall cease to be employed by the Company at any time prior to December 31,2005, by reason of total and permanent disability, the Company shall distribute to Participant an amount equal to the Award which would have been earnedduring the Performance Period in which the disability occurred, pro rated through the date of disability, plus Dividend Equivalents. The foregoing distributionshall be made at the time specified in paragraph 3 above.

(c) Retirement. Unless otherwise determined by the Committee, if Participant shall cease to be employed by the Company at any time prior to December 31,2005, by reason of retirement on or after age 65 or retirement on or after age 55 with the consent of the Company, the Company shall distribute to Participant theAward which would have been earned during the Performance Period in which retirement occurred pro rated through the date of retirement, plus DividendEquivalents; provided, however, that such Award and Dividend Equivalents shall be forfeited if Participant directly or indirectly accepts employment by orserves as a consultant, agent, stockholder, corporate officer or director of, or in any other representative capacity for, any entity which is engaged in a line ofbusiness in a geographic area in which the Company (either directly or through a subsidiary or affiliate) is engaged on the date of Participant’s retirement andwhich is a competitor of the Company or any of its subsidiaries. The foregoing distribution shall be made at the time specified in paragraph 3 above.

(d) Change in Control. If a “Change in Control” as defined in the 2000 SIP and successor plans thereto shall occur while Participant is employed by theCompany and prior to determination and distribution of this Award, this Award and any Dividend Equivalents shall be paid pursuant to the terms of the 2000SIP.

(e) Other Separations. If Participant shall cease to be employed by the Company at any time prior to the earlier of (i) a change in control and (ii) the date ofdetermination and distribution of the Award described herein, for any reason other than death, total and permanent disability, retirement on or after age 65 orretirement on or after age 55 with the consent of the Company, any Award for the Performance Period in which such cessation of employment occurs shall beforfeited unless the Committee specifically authorizes otherwise.

6. Administration of the Award. The Award shall be administered by the Committee designated in the 2000 SIP. The Committee may establish rules andregulations for the administration and interpretation of Award. All such rules, regulations and interpretations relating to the Award adopted by the Committeeshall be conclusive and binding on all parties.

7. Miscellaneous.

(a) Award Confers No Right to Employment. Nothing in this Award shall be construed as an employment contract or as otherwise conferring upon Participantany right to remain in the employ of the Company or any of its subsidiaries.

(b) Withholding Taxes. The Company may, in its discretion, deduct any such required withholding taxes from the amount to be distributed under this Award orfrom any other amount then or thereafter payable by the Company to Participant.

(c) Interest. No interest shall accrue at any time on this Award or any dividend, distribution or other part thereof.

(d) Successors. This Award shall be binding upon and inure to the benefit of any successor or successors to the Company.

(e) Governing Law. This Award shall be governed in accordance with the laws of the State of Illinois.

(f) Restrictions on Transfer. Neither this Award nor any rights hereunder may be transferred or assigned by Participant other than by will or by the laws ofdescent and distribution or pursuant to beneficiary designation procedures approved by the Company. Any transfer or any attempted assignment, pledge orhypothecation, whether or not by operation of law, shall be void.

(g) It is anticipated that any shares of common stock delivered pursuant to this Award will be Treasury shares of the Company acquired prior to or during theterm of the Award, and issued subject to the terms of this Award, the 2000 SIP and such rules as determined by the Committee.

IN WITNESS WHEREOF, the Company has caused this Award to be duly executed by its duly authorized officer.

R. R. DONNELLEY & SONS COMPANY

By:

Authorized Officer

Accepted:

(Participant)

Exhibit 10(n)

SEPARATION AND RELEASE AGREEMENT

This Separation and Release Agreement (“Agreement”) is entered into by and between R. R. Donnelley & Sons Company (“Donnelley”), its affiliated entitiesand their respective shareholders, directors, officers and employees (Donnelley and such others collectively referred to as the “Company”), and Michael J.Portland (the “Executive”) as of the 17th day of November, 2003.

WHEREAS, Donnelley has employed Executive as Executive Vice President under an offer of employment dated March 15, 2002 (the “Offer”); and

WHEREAS, the Company and Executive mutually agree to Executive’s severance from Donnelley and to settle any and all matters and potential claims on theterms and conditions and for the compensation stated herein;

NOW, THEREFORE, in consideration of the mutual promises and agreements set forth below, the Company and Executive agree as follows:

1. Separation Date. Executive shall remain on the payroll of Donnelley at his base salary through December 31, 2003 (“Separation Date”), at which timehis employment will terminate. Effective on the Separation Date, Executive shall be deemed to have resigned from any and all positions he may hold withthe Company.

2. Severance Obligations and Payments. So long as Executive is not in breach of the terms contained in paragraphs 3, 4, 5, and 6 of this Agreement, theCompany will cause the following to be paid to Executive and shall cause the following events to occur:

a. Pursuant to the terms of the Offer, the Company, for the twelve (12) months beginning January, 2004, shall pay to Executive a monthly gross sum of$23,916.67 as a severance benefit and not as compensation. The total payments to be received by Executive hereunder shall equal $287,000, andshall be made in accordance with the normal payroll practices of the Company.

b. The rights of Executive under a stock option grant made to Executive by the Company on April 15, 2002, shall be cancelled, whether or not anyportion thereof is vested.

c. An agreement covering an option grant made to Executive on March 26, 2003, shall be amended as follows:

(i) Delete the contents of paragraph 5 (e) and replace it with the following:

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Provided that Optionee is in compliance with his obligations contained in a Separation and Release Agreement dated November 17, 2003,then notwithstanding the cessation of employment, the Option shall continue to vest in accordance with the provisions of paragraph 1(c)above and shall be exercisable during the Option Term. Should Optionee not comply with his obligations contained in the Separation andRelease Agreement (including paragraphs 3 and 4 thereof), any portion of the Option not yet exercised by Optionee shall be immediatelycancelled.

(ii) Delete the contents of paragraph 7 and replace it with the following:

This option may be exercised by the executor, administrator, personal representative or Beneficiary of Optionee during the Option Termremaining, but only to the extent Optionee was vested in, and entitled to exercise the Option, on the date of Optionee’s death.

d. At the same time as paid to other executives of the Company, the Executive shall receive in cash and not in stock the value, if any, earned under theprovisions of the 2001 Senior Management Long Term Incentive Award made to Executive on April 15, 2002. Executive acknowledges that theCompany may withhold from such payment, if any, any amounts remaining outstanding from Executive to the Company under the terms of theLoan Agreement described in paragraph 6 below.

e. The 2003 Senior Management Long Term Incentive Award made to Executive on January 23, 2003, pursuant to the terms of the 2000 StockIncentive Plan, shall be cancelled and Executive shall have no further rights under such award.

f. Executive shall receive payment within thirty days of the Separation Date for all vacation days accrued and untaken as of the Separation Date. Nofurther vacation will accrue after the Separation Date.

g. At the time provided for in the Annual Management Incentive Plan for 2003, the Company will pay Executive his 2003 plan year bonus, if any isearned, in accordance with the funding and payout mechanisms specified in the plan and based on the assumption that Executive had successfullycompleted 100% of his OGSMs with a “meets expectations” performance rating.

h. Executive shall be entitled to utilize the balance held by the Company in a financial planning account for reimbursement for tax or financialplanning, or legal services required in connection with the review of this Agreement, provided that Executive shall utilize any balance on or beforeJuly 31, 2004, and provide documentation and seek reimbursement from the Company no later than December 1, 2004. Should any balance beremaining in the financial planning account at December 31, 2004, the Company shall cancel that balance, and thereafter the Executive shall not be

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entitled to any reimbursement for expenses incurred for tax, legal or financial planning services.

i. Executive shall submit within fifteen (15) days of the Separation Date all expense account records and vouchers relating to his employment with theCompany and the Company shall reimburse said expenses within thirty (30) days of receipt.

j. The Company will pay for executive outplacement services for the Executive at an outplacement firm of the Company’s, such services to bedelivered to Executive by October 31, 2004.

k. Executive acknowledges that the Company has advised him that, pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985(ACOBRA@), he has a right to elect continued coverage under the Company’s group health plans, at his own expense, for a period of up to eighteen(18) months from the Separation Date; provided, however, that until the earlier of (a) expiration of twelve (12) months of COBRA benefits or (b)obtaining employment status with another employer that provides comparable health benefits, the Company shall reimburse Executive for thedifference between (x) what Executive would pay for continuing health benefits had he continued to be employed by the Company and (y) whatExecutive actually incurs for like coverage under COBRA. Executive shall provide the Company with any evidence of actual COBRA payments asmay be necessary to determine the Company’s obligations under this subparagraph.

l. Executive has elected to participate in the Company’s supplemental life insurance and supplemental disability insurance programs for seniorexecutives. As of the Separation Date, the Company will have no further obligations with respect to payment of premiums for policies held byExecutive, but the Executive shall be free to continue to own and maintain such policies at his own expense.

m. The payments and benefits described in this paragraph shall be subject to withholding taxes to the extent required by law.

3. Non−Disparagement. Neither the Executive nor any person representing the Company in the giving of employment references shall at any timedisparage the other or portray the other in a negative light, except that nothing herein shall prevent the Company from making any of its books and recordsavailable to third parties as required by law. Executive shall not disclose to any one (without the prior written consent of the Company) any informationregarding the Company or its financial condition, contractual arrangements, internal affairs, or governance which is non−public, confidential, orproprietary or which would in any way injure the reputation of the Company or of any of the (past or present) shareholders, members, directors, officers,employees, agents or attorneys of the Company. Executive acknowledges that a breach by him of his obligations under this paragraph 3 shall result in theright of the Company to terminate its obligations under this Agreement and the payment of any monies pursuant to any of the provisions hereof, includingparagraph 2.

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4. Release. Executive, on behalf of himself, his heirs, executors, attorneys, administrators, and assigns, agrees to release the Company (including currentand former employees, partners, fiduciaries, directors, agents, divisions, parents, subsidiaries, affiliates, attorneys or other related entities) from all knownor unknown claims, demands, agreements, actions, suits, causes of action, damages and liabilities of any kind, in law or equity or otherwise, whichExecutive has, had or may have against Company related to Executive’s employment, resignation from his positions with the Company, or separation fromDonnelley, including, but not limited to, claims which could have been asserted under any fair employment, contract or tort law, or any other federal, stateor local law, regulation or ordinance, such as Title VII of the Civil Rights Act of 1964, the Employee Retirement Income Security Act, the AgeDiscrimination in Employment Act, the Americans with Disabilities Act, the Older Workers Benefit and Protection Act, or under any compensation,bonus, severance, or other benefit plan. Notwithstanding the foregoing, nothing herein shall release or waive any rights Executive may have to enforce theprovisions of this Agreement, or release any claims for any benefits due to Executive under any stock or benefit plans available to Executive as a result ofhis later retirement (as defined in applicable retirement plans) or under the provisions hereof. Executive acknowledges and agrees that the release andcovenant not to sue included in this paragraph are essential and material terms of this Agreement and that without such release and covenant not to sue noagreement would have been reached by the parties. Executive understands and acknowledges the significance and consequences of this release, and herebyfurther acknowledges the receipt of separate consideration beyond that to which he would otherwise be entitled in exchange for such release.

5. Effect on Other Agreements. On March 23, 2002, Executive signed an Agreement Regarding Confidential Information, Intellectual Property, andNon−Solicitation of Employees, a copy of which is attached hereto as Exhibit A. Executive understands and acknowledges that he will be expected toabide, and will abide, by the terms of that Agreement. Executive also agrees to remain bound by any agreement signed relating to any credit card issued toExecutive as a Donnelley employee.

6. Loan Agreement. Executive acknowledges and reaffirms his obligations under an agreement dated March 15, 2002 (the “Loan Agreement”), to repay tothe Company a loan in the principal amount of $200,000, in accordance with the terms of the Loan Agreement and paragraph 2(d) above. For purposes ofthe Loan Agreement, the Separation Date shall be the date of termination of employment.

7. Electronic Equipment. Executive will return to the Company any computers or other work−related equipment furnished to him during the course of hisemployment. All software programs and files belonging to the Company shall also be returned to the Company.

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8. Retirement Benefits. Executive acknowledges that he has not vested in, and will have no rights to benefits provided under any of the Companyretirement plans (retirement benefit plan, cash balance plan, unqualified supplemental retirement plan, or otherwise).

9. Entire Agreement. This Agreement embodies the entire agreement and understanding of the parties with regard to the matters described in thisAgreement and supersedes any and all prior or contemporaneous agreements and understandings, oral or written, between Executive and the Company.

10. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws (as opposed to the conflict of law provisions)and decisions of the State of Illinois, as applied to agreements executed in and to be fully performed within Illinois.

11. Legal Advice. In signing below, Executive expressly acknowledges that he has read this Agreement carefully, that he fully understands its terms andconditions, that he has been advised of his rights and has been advised to consult an attorney prior to executing this Agreement. Executive intends to belegally bound by the terms and conditions of this Agreement.

12. Successors and Assigns. The rights and obligations of the Company under this Agreement shall inure to the benefit of and be binding upon itssuccessors and assigns and Executive’s rights hereunder shall inure to the benefit of his legal representatives or designated beneficiaries.

13. Severability. If any provision of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainingprovisions shall nevertheless continue in full force and effect without being impaired or invalidated in any way.

14. Notices. All notices or other communications required or permitted hereunder shall be in writing and may be delivered by hand, by facsimile, bynationally recognized private courier or by United States mail. Notices by mail shall be deemed given two (2) business days after being deposited in theUnited States mail, postage prepaid, registered or certified mail, return receipt requested. Notices delivered by facsimile or private courier shall be deemedgiven on the first business day following the date of sending. All notices or other communications shall be addressed as follows:

If to the Company, to:R. R. Donnelley & Sons Company77 West Wacker DriveChicago, Illinois 60601−1696Attn: General CounselFacsimile: 312/326−7620

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If to Executive, to:Mr. Michael J. Portland[Home Address]

or to such other address as such party may indicate by a notice delivered to the other.

IN WITNESS WHEREOF the parties have executed this Agreement as of the date first above written.

R. R. DONNELLEY & SONS COMPANY

By: /s/ HAVEN E. COCKHERHAM /s/ MICHAEL J. PORTLAND

Name: Haven E. Cockerham, ExecutiveSenior Vice President

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Exhibit 10(o)

December 26, 2003

Mr. Michael B. Allen[Home Address]

Dear Mike:

As of December 31, 2003, your position with R.R. Donnelley & Sons Company (the “Company”) has been eliminated, and you will receive workforce reductionbenefits under the terms of the Company Separation Pay Plan. You have previously been furnished with materials explaining those benefits and the releaserelating thereto, and this letter is intended only to clarify or supplement certain provisions of those materials.

In addition to standard workforce reduction pay continuation, COBRA continuation and outplacement services, you will have the following rights in connectionwith your termination of employment:

In accordance with the terms of agreements covering your option grants, you will be allowed to exercise the grants or portions of grants that arevested on December 31, 2003. Any vested grant, other than a grant dated March 23, 1995 for 100 shares (“Broad−based Grant”), will be exercisablefor the period ending 90 days from December 31, 2003. The Broad−based Grant shall be exercisable in accordance with its terms. Any option grantor portion of any option grant unvested at December 31, 2003, as well as restricted stock awards made to you on each of July 22, 1999 and March 26,2003, will be cancelled.

At the time as payout is made to other executives of the Company, you will be paid any amount actually earned under the 2001 Senior ManagementLong Term Incentive Award made on January 25, 2001. The payout will be made to you in the same proportion of stock and cash as is designated bythe Human Resources Committee of the Board of Directors of the Company for payouts to other executives. The 2003 Senior Management LongTerm Incentive Award made to you on January 23, 2003, will be cancelled and you will have no further rights under such award.

You will be paid, either in conjunction with your regular pay for December 31, 2003, or within thirty days thereafter, for all vacation days accruedand untaken as of December 31, 2003 (including banked amounts), and no further vacation will accrue.

At the time provided for in the Annual Management Incentive Plan for 2003, the Company will pay you your 2003 plan year bonus, if any is earned,in accordance with the funding and payout mechanisms specified in the plan and based on the

December 26, 2003Page 2 of 2

assumption that you successfully completed 100% of your OGSMs with a “meets expectations” performance rating.

In connection with your position, you had certain sums available for reimbursement of expenses incurred by you for financial planning. If you haveincurred any financial planning expenses during 2003 for which you have not yet sought reimbursement and for which funds are available in yourfinancial planning account, you are free to seek reimbursement from the Company from such account provided you furnish copies of receipts to theCompany on or prior to February 28, 2004. To the extent you do not seek reimbursement prior to February 28, 2004, the balance in your account willbe cancelled and no longer available to you.

The Company will reimburse you for up to $20,000 in legal fees incurred by you in consulting with an attorney surrounding the terms and conditionsof your termination of employment. Please furnish receipts as soon as they are available.

You will be reimbursed for all expense account records and vouchers relating to your employment with the Company within thirty (30) days ofreceipt.

To the extent that in connection with outplacement services provided to you (described in materials you have received), you are given equipment(such as computers, printers, and similar devices) and your retention of such equipment following the termination of outplacement services does notresult in additional expense to the Company beyond that paid for the services themselves, you will be entitled to retain such equipment for your ownuse.

The payments and benefits described in this paragraph shall be subject to withholding taxes to the extent required by law.

On October 6, 1985, you signed an Agreement Regarding Confidential Information, Intellectual Property, and Non−Solicitation of Employees, a copy of which isattached hereto as Exhibit A. You understand that you are expected to abide by the terms of that Agreement. You also understand that you remain bound by anyagreement signed relating to any credit card issued to you as a Company employee.

The Company acknowledges that you have returned keys, credit cards, ID cards, computers or other work−related equipment furnished to you during the courseof your employment. All software programs and files belonging to the Company, if any remain in your possession, should be returned to the Company.

R. R. DONNELLEY & SONS COMPANY

By: /s/ MONICA M. FOHRMAN

EXHIBIT 12

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES(In Thousands except ratios)

Twelve Months Ending

December 31, 2003 December 31, 2002 December 31, 2001 December 31, 2000 December 31, 1999

Earnings available for fixed charges:Earnings before income taxes $208,277 $ 175,733 $ 74,894 $ 433,984 $ 506,529Less/add: Equity (income) loss ofminority−owned companies (2,743) (5,586) 971 3,122 (1,989)Add: Dividends received frominvestees under the equity method 973 81 831 1,763 2,757Less/add: Minority interest (income)loss in majority−owned subsidiaries (143) (656) 59 208 588Add: Fixed charges before capitalizedinterest 73,923 81,291 90,340 108,493 106,026Add: Amortization of capitalizedinterest 6,985 7,207 7,509 7,735 8,127

Total earnings available for fixedcharges $287,272 $ 258,070 $ 174,604 $ 555,305 $ 622,038

Fixed charges:Interest expense $ 50,359 $ 62,818 $ 71,183 $ 89,639 $ 88,164Interest portion of rental expense 23,530 17,975 18,907 18,393 17,077Amortization of discount related toindebtedness 34 498 250 461 785

Total fixed charges before capitalizedinterest 73,923 81,291 90,340 108,493 106,026Capitalized interest 3,120 5,300 3,070 4,554 5,500

Total fixed charges $ 77,043 $ 86,591 $ 93,410 $ 113,047 $ 111,526

Ratio of earnings to fixed charges 3.73 2.98 1.87 4.91 5.58

Exhibit 14

R. R. DONNELLEY & SONS COMPANY

CODE OF ETHICS for the CHIEF EXECUTIVE OFFICER andSENIOR FINANCIAL OFFICERS

(Effective June 1, 2003)

R. R. Donnelley & Sons Company (the “Company”) maintains its “Principles of Ethical Business Conduct” and the policies referred to therein applicable to alldirectors and employees of the Company. The Chief Executive Officer (“CEO”) and all Senior Financial Officers (including particularly the Chief FinancialOfficer and the Controller) are bound by the provisions set forth in the Principles relating to ethical conduct and fair dealing, conflicts of interest, confidentialityof Company information and compliance with law, but in addition are subject to the following specific policies:

1. The CEO and all Senior Financial Officers are responsible for full, fair, accurate, timely and understandable disclosure in the periodic reportsrequired to be filed by the Company with the Securities and Exchange Commission. Accordingly, it is the responsibility of the CEO and each SeniorFinancial Officer promptly to bring to the attention of the Company’s Disclosure Committee any material information of which he or she maybecome aware that affects the disclosures made by the Company in its public filings or otherwise assist the Company’s Disclosure Committee infulfilling its responsibilities as specified in the Company’s Disclosure Policy.

2. The CEO and each Senior Financial Officer shall promptly bring to the attention of the Company’s Disclosure Committee and the Audit Committeeany information he or she may have concerning (a) significant deficiencies in the design or operation of internal controls which could adverselyaffect the Company’s ability to record, process, summarize and report financial data or (b) any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the Company’s financial reporting, disclosures or internal controls.

3. The CEO and each Senior Financial Officer shall promptly bring to the attention of the General Counsel or the CEO and to the Audit Committeeany information he or she may have concerning any violation of the Company’s Principles of Ethical Business Conduct, including any actual orapparent conflicts of interest between personal and professional relationships, involving any management or other employees who have a significantrole in the Company’s financial reporting, disclosures or internal controls. All investigations into any matter reported hereunder shall be handled asdescribed in the Company’s whistleblower procedures.

4. The CEO and each Senior Financial Officer shall promptly bring to the attention of the General Counsel or the CEO and to the Audit Committeeany information he or she may have concerning evidence of a material violation of the securities or other laws, rules or regulations applicable to theCompany and the operation of its business, by the Company or any agent thereof, or of these additional procedures.

5. The Board of Directors shall determine, or designate the appropriate committee of the Board to determine, appropriate actions to be taken in theevent of violations of the Principles of Ethical Business Conduct or of these additional procedures by the CEO and the Company’s Senior FinancialOfficers. Such actions shall be reasonably designed to deter wrongdoing and to promote accountability for adherence to the Principles of EthicalBusiness Conduct and to these additional procedures, and shall include actions up to and including termination of the individual’s employment. Indetermining what action is appropriate in a particular case, the Board of Directors or such committee shall take into account all relevant information,including the nature and severity of the violation, whether the violation was a single occurrence or repeated occurrences, whether the violationappears to have been intentional or inadvertent, whether the individual in question had been advised prior to the violation as to the proper course ofaction and whether or not the individual in question had committed other violations in the past.

6. The waiver of the application of the Principles of Ethical Business Conduct or these additional procedures granted to the CEO or any SeniorFinancial Officer of the Company shall be solely within the authority of the Board of Directors or the committee designated in paragraph 5 above,and shall be reported as required by law or regulation.

Form 10−KYear Ended December 31, 2003Exhibit 21

SUBSIDIARIES OF R. R. DONNELLEY & SONS COMPANY

Subsidiaries of R. R. Donnelley & Sons Company Place of Incorporation

Freight Systems, Inc. CaliforniaCaslon Incorporated DelawareCTC Direct, Inc. DelawareDonnelley Caribbean Graphics, Inc. DelawareHaddon Craftsmen, Inc. DelawareHCI Holdings, Inc. DelawareMobium Corporation DelawareMomentum Logistics, Inc. DelawarePan Associates, L.P. DelawareRRD Dutch Holdco, Inc. DelawareR. R. Donnelley (Chile) Holdings, Inc. DelawareR. R. Donnelley (Santiago) Holdings, Inc. DelawareR. R. Donnelley Global, Inc. DelawareR. R. Donnelley Mendota, Inc. DelawareR. R. Donnelley Printing Company DelawareR. R. Donnelley Printing Company, L.P. DelawareM/B Companies, Inc. IowaR. R. Donnelley Receivables, Inc. NevadaR. R. Donnelley Seymour, Inc. New JerseyR. R. Donnelley Norwest Inc. OregonHeritage Preservation Corporation South CarolinaOmega Studios−Southwest, Inc. TexasIridio, Inc. WashingtonDonnelley Cochrane Argentina S.A. ArgentinaDonnelley Cochrane Graficos Editora do Brasil Limitada BrazilMatrix Distribudora de Directorios S A. BrazilEditorial Lord Cochrane, S.A. ChileR. R. Donnelley (Chile) Holdings, Inc. y Compania Limitada ChileR. R. Donnelley Chile Limitada ChileR. R. Donnelley (Santiago) Holdings, Inc. y Compania Chile

Subsidiaries of R. R. Donnelley & Sons Company Place of Incorporation

Shanghai Donnelley Printing Co., Ltd. ChinaShenzhen Donnelley Bright Sun Printing Co. Ltd. ChinaR. R. Donnelley Financial Asia Limited Hong KongImpresora Donneco Internacional, S.A. de C.V. MexicoLaboratorio Lito Color S.A. de C.V. MexicoR. R. Donnelley (Mexico) S.A. de C.V. MexicoSierra Industrial, S.A. de C.V. MexicoR. R. Donnelley Europe B.V. The NetherlandsR. R. Donnelley Holdings B.V. The NetherlandsR. R. Donnelley Holdings C.V. The NetherlandsR. R. Donnelley Europe, Sp. zo. o. PolandR. R. Donnelley Poland, Sp. zo. o. PolandR. R. Donnelley U.K. Directory Limited United KingdomR. R. Donnelley (U.K.) Limited United Kingdom

Exhibit 23

INDEPENDENT AUDITORS’ CONSENT

We consent to the incorporation by reference in R.R. Donnelley & Sons Company’s previously filed Form S−8 Registration Statement Nos. 333−87430 and333−55788 for the R.R. Donnelley & Sons Company 2000 Broad−Based Stock Incentive Plan, 333−83414 for the R.R. Donnelley & Sons CompanyNonqualified Deferred Compensation Plan, 333−37042 for the R.R. Donnelley & Sons Company 2000 Stock Incentive Plan, 333−80995 for the DonnelleyDeferred Compensation and Voluntary Savings Plan, 033−61387 for the R.R. Donnelley & Sons Company 1995 Stock Incentive Plan and 033−52805 for theDonnelley Shares Stock Option Plan; and in R.R. Donnelley & Sons Company’s previously filed Form S−3 Registration Statement Nos. 333−83382 for the R.R.Donnelley & Sons Company Debt Securities, Common Stock and Preferred Stock, 333−44303 for the R.R. Donnelley & Sons Company Common Stock and033−57807 for the R.R. Donnelley & Sons Company Debt Securities of our report related to R.R. Donnelley & Sons Company dated February 18, 2004 (whichexpressed an unqualified opinion and included an explanatory paragraph as to the Company’s changes in the composition of its reportable segments in 2002 and2003 and the Company’s change in its accounting for goodwill and intangible assets in 2002 and our audit of the transitional adjustments related to these changesreflected in the 2001 financial statements), appearing in this Annual Report on Form 10−K of R.R. Donnelley & Sons Company for the year ended December 31,2003.

DELOITTE & TOUCHE LLPChicago, IllinoisFebruary 23, 2004

Exhibit 24

POWER OF ATTORNEY

The undersigned hereby constitutes and appoints Monica M. Fohrman his or her true and lawful attorney−in−fact, with full power and authority, for the purposeof executing, in the name and on behalf of the undersigned as a director and/or officer of R. R. Donnelley & Sons Company, a Delaware corporation (the“Company”), the Company’s Annual Report on Form 10−K for the year ended December 31, 2003 (the “Annual Report”), and to deliver on behalf of theundersigned such Annual Report for filing with the Securities and Exchange Commission. The undersigned hereby grants unto such attorney−in−fact full powerof substitution and revocation in the premises and hereby ratifies and confirms all that such attorney−in−fact may do or cause to be done by virtue of thesepresents.

Dated: February 20, 2004

By: /s/ JOSEPH B. ANDERSON

Joseph B. Anderson

Exhibit 24

POWER OF ATTORNEY

The undersigned hereby constitutes and appoints Monica M. Fohrman his or her true and lawful attorney−in−fact, with full power and authority, for the purposeof executing, in the name and on behalf of the undersigned as a director and/or officer of R. R. Donnelley & Sons Company, a Delaware corporation (the“Company”), the Company’s Annual Report on Form 10−K for the year ended December 31, 2003 (the “Annual Report”), and to deliver on behalf of theundersigned such Annual Report for filing with the Securities and Exchange Commission. The undersigned hereby grants unto such attorney−in−fact full powerof substitution and revocation in the premises and hereby ratifies and confirms all that such attorney−in−fact may do or cause to be done by virtue of thesepresents.

Dated: February 20, 2004

By: /s/ GREGORY Q. BROWN

Gregory Q. Brown

Exhibit 24

POWER OF ATTORNEY

The undersigned hereby constitutes and appoints Monica M. Fohrman his or her true and lawful attorney−in−fact, with full power and authority, for the purposeof executing, in the name and on behalf of the undersigned as a director and/or officer of R. R. Donnelley & Sons Company, a Delaware corporation (the“Company”), the Company’s Annual Report on Form 10−K for the year ended December 31, 2003 (the “Annual Report”), and to deliver on behalf of theundersigned such Annual Report for filing with the Securities and Exchange Commission. The undersigned hereby grants unto such attorney−in−fact full powerof substitution and revocation in the premises and hereby ratifies and confirms all that such attorney−in−fact may do or cause to be done by virtue of thesepresents.

Dated: February 20, 2004

By: /s/ Martha Layne Collins

Exhibit 24

POWER OF ATTORNEY

The undersigned hereby constitutes and appoints Monica M. Fohrman his or her true and lawful attorney−in−fact, with full power and authority, for the purposeof executing, in the name and on behalf of the undersigned as a director and/or officer of R. R. Donnelley & Sons Company, a Delaware corporation (the“Company”), the Company’s Annual Report on Form 10−K for the year ended December 31, 2003 (the “Annual Report”), and to deliver on behalf of theundersigned such Annual Report for filing with the Securities and Exchange Commission. The undersigned hereby grants unto such attorney−in−fact full powerof substitution and revocation in the premises and hereby ratifies and confirms all that such attorney−in−fact may do or cause to be done by virtue of thesepresents.

Dated: February 20, 2004

By: /s/ James R. Donnelley

Exhibit 24

POWER OF ATTORNEY

The undersigned hereby constitutes and appoints Monica M. Fohrman his or her true and lawful attorney−in−fact, with full power and authority, for the purposeof executing, in the name and on behalf of the undersigned as a director and/or officer of R. R. Donnelley & Sons Company, a Delaware corporation (the“Company”), the Company’s Annual Report on Form 10−K for the year ended December 31, 2003 (the “Annual Report”), and to deliver on behalf of theundersigned such Annual Report for filing with the Securities and Exchange Commission. The undersigned hereby grants unto such attorney−in−fact full powerof substitution and revocation in the premises and hereby ratifies and confirms all that such attorney−in−fact may do or cause to be done by virtue of thesepresents.

Dated: February 18, 2004

By: /s/ Thomas S. Johnson

Exhibit 24

POWER OF ATTORNEY

The undersigned hereby constitutes and appoints Monica M. Fohrman his or her true and lawful attorney−in−fact, with full power and authority, for the purposeof executing, in the name and on behalf of the undersigned as a director and/or officer of R. R. Donnelley & Sons Company, a Delaware corporation (the“Company”), the Company’s Annual Report on Form 10−K for the year ended December 31, 2003 (the “Annual Report”), and to deliver on behalf of theundersigned such Annual Report for filing with the Securities and Exchange Commission. The undersigned hereby grants unto such attorney−in−fact full powerof substitution and revocation in the premises and hereby ratifies and confirms all that such attorney−in−fact may do or cause to be done by virtue of thesepresents.

Dated: February 18, 2004

By: /s/ Oliver R. Sockwell

Exhibit 24

POWER OF ATTORNEY

The undersigned hereby constitutes and appoints Monica M. Fohrman his or her true and lawful attorney−in−fact, with full power and authority, for the purposeof executing, in the name and on behalf of the undersigned as a director and/or officer of R. R. Donnelley & Sons Company, a Delaware corporation (the“Company”), the Company’s Annual Report on Form 10−K for the year ended December 31, 2003 (the “Annual Report”), and to deliver on behalf of theundersigned such Annual Report for filing with the Securities and Exchange Commission. The undersigned hereby grants unto such attorney−in−fact full powerof substitution and revocation in the premises and hereby ratifies and confirms all that such attorney−in−fact may do or cause to be done by virtue of thesepresents.

Dated: February 18, 2004

By: /s/ Bide L. Thomas

Exhibit 24

POWER OF ATTORNEY

The undersigned hereby constitutes and appoints Monica M. Fohrman his or her true and lawful attorney−in−fact, with full power and authority, for the purposeof executing, in the name and on behalf of the undersigned as a director and/or officer of R. R. Donnelley & Sons Company, a Delaware corporation (the“Company”), the Company’s Annual Report on Form 10−K for the year ended December 31, 2003 (the “Annual Report”), and to deliver on behalf of theundersigned such Annual Report for filing with the Securities and Exchange Commission. The undersigned hereby grants unto such attorney−in−fact full powerof substitution and revocation in the premises and hereby ratifies and confirms all that such attorney−in−fact may do or cause to be done by virtue of thesepresents.

Dated: February 18, 2004

By: /s/ Norman H. Wesley

Exhibit 24

POWER OF ATTORNEY

The undersigned hereby constitutes and appoints Monica M. Fohrman his or her true and lawful attorney−in−fact, with full power and authority, for the purposeof executing, in the name and on behalf of the undersigned as a director and/or officer of R. R. Donnelley & Sons Company, a Delaware corporation (the“Company”), the Company’s Annual Report on Form 10−K for the year ended December 31, 2003 (the “Annual Report”), and to deliver on behalf of theundersigned such Annual Report for filing with the Securities and Exchange Commission. The undersigned hereby grants unto such attorney−in−fact full powerof substitution and revocation in the premises and hereby ratifies and confirms all that such attorney−in−fact may do or cause to be done by virtue of thesepresents.

Dated: February 20, 2004

By: /s/ Stephen M. Wolf

Exhibit 31.1

Certification Pursuant to Rule 13a−14(a) and Rule 15d−14(a)of the Securities Exchange Act of 1934

I, William L. Davis, certify that:

1. I have reviewed this annual report on Form 10−K of R.R. Donnelley & Sons Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a−15(e) and 15d−15(e)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosures controls and procedures to be designed under our supervision, to ensurethat material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularlyduring the period in which this report is being prepared;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness ofthe disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over the financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting.

Date: February 23, 2004

/s/ WILLIAM L. DAVIS

William L. DavisChairman, President and Chief Executive Officer

Exhibit 31.2

Certification Pursuant to Rule 13a−14(a) and Rule 15d−14(a)of the Securities Exchange Act of 1934

I, Gregory A. Stoklosa, certify that:

1. I have reviewed this annual report on Form 10−K of R.R. Donnelley & Sons Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a−15(e) and 15d−15(e)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularlyduring the period in which this annual report is being prepared;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness ofthe disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over the financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting.

Date: February 23, 2004

/s/ GREGORY A. STOKLOSA

Gregory A. StoklosaExecutive Vice President and Chief Financial Officer

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

CERTIFICATION PURSUANT TO RULE 13a−14(a) AND RULE 15d−14(a)SECTION 1350, CHAPTER 63 OF TITLE 18

OF THE UNITED STATES CODE,AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES−OXLEY ACT OF 2002

In connection with the Annual Report of R. R. Donnelley & Sons Company (the “Company”) on Form 10−K for the period ending December 31, 2003 as filedwith the Securities and Exchange Commission on the date hereof (the “Report”), I, William L. Davis, Chief Executive Officer of the Company, certify, pursuantto 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes−Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ William L. Davis

William L. DavisChief Executive OfficerFebruary 23, 2004

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

CERTIFICATION PURSUANT TO RULE 13a−14(a) AND RULE 15d−14(a)SECTION 1350, CHAPTER 63 OF TITLE 18

OF THE UNITED STATES CODE,AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES−OXLEY ACT OF 2002

In connection with the Annual Report of R. R. Donnelley & Sons Company (the “Company”) on Form 10−K for the period ending December 31, 2003 as filedwith the Securities and Exchange Commission on the date hereof (the “Report”), I, Gregory A. Stoklosa, Chief Financial Officer of the Company, certify,pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes−Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Gregory A. Stoklosa

Gregory A. StoklosaChief Financial OfficerFebruary 23, 2004

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